<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended September 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 000-23571
PROGRESSIVE BANCORP, INC.
- -------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
Delaware 36-4178818
- --------------------------------------------- ----------------------------------
(State or other jurisdiction of incorporation (I.R.S. Employer Identification No.)
or organization)
601-617 Court Street, Pekin, Illinois 61554
- ---------------------------------------------- ---------------------
(Address of principal executive offices) (Zip Code)
</TABLE>
Registrant's telephone number, including area code: (309) 347-5101
--------------
Securities Registered Pursuant to Section 12(b) of the Act:
None
Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share
-------------------------------------------
(Title of class)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
requirements for the past 90 days. YES [X] . NO .
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-KSB. [X]
The Registrant's revenues for the most recent fiscal year were $6.9 million.
The aggregate market value of the voting stock held by non-affiliates of the
Registrant, computed by reference to the last sales price at which such stock
was sold on September 30, 1997 was $5,406,576. (The exclusion from such amount
of the market value of the shares owned by any person shall not be deemed an
admission by the Registrant that such person is an affiliate of the Registrant.)
As of December 12, 1997, there were issued and outstanding 168,172 shares of
the Registrant's Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
Parts II and IV of Form 10-KSB--Portions of the Annual Report to
Stockholders for the fiscal year ended September 30, 1997.
Part III of Form 10-KSB--Portions of the Proxy Statement for Annual Meeting
of Stockholders.
<PAGE>
PART I
ITEM 1. BUSINESS
GENERAL
Progressive Bancorp, Inc. (the "Company" or the "Registrant") is a Delaware
corporation which is the holding company for Pekin Savings Bank, an
Illinois-chartered stock savings bank headquartered in Pekin, Illinois (the
"Bank"). The Company was organized by the Bank in the fourth quarter of 1997 for
the purpose of acquiring all of the capital stock of the Bank in connection with
the reorganization of the Bank into the bank holding company structure. The only
significant asset of the Company is the capital stock of the Bank, and the
business of the Company currently consists solely of the business of the Bank.
Since the Company was formed in the last calendar quarter of 1997 (subsequent to
the end of the 1997 fiscal year), all financial information presented herein is
the financial data for the Bank and its subsidiary on a consolidated basis.
The Company's common stock is traded over-the-counter through the National
Daily Quotation System "pink sheets" published by the National Quotation Bureau,
Inc.
The Bank was founded in 1882 and has been a member of the Federal Home Loan
Bank ("FHLB") System since 1955. Its deposits are insured up to the regulatory
maximum by the Savings Association Insurance Fund ("SAIF"), which is
administered by the Federal Deposit Insurance Corporation ("FDIC"). At September
30, 1997, the Bank had total assets of $85.6 million, total deposits of $69.1
million, and stockholders' equity of $7.3 million. The Bank had net income of
$695,000 and $393,000 for the fiscal years ended September 30, 1997 and 1996,
respectively.
The Bank is, and intends to continue to be, a community-oriented financial
institution committed to offering a variety of financial services to meet the
needs of its local community. The Bank is engaged primarily in the business of
attracting deposits from the general public and using such funds to originate
mortgage loans for the purchase of single-family homes in Tazewell and Mason
counties, Illinois. The Bank also invests in mortgage-backed securities, all of
which are secured by one- to four-family residential mortgage loans and
guaranteed by the Federal Home Loan Mortgage Corporation ("FHLMC"), Federal
National Mortgage Association ("FNMA") and Government National Mortgage
Association ("GNMA"). At September 30, 1997, one- to four-family loans and
mortgage-backed securities secured by one- to four-family residential mortgage
loans represented 68.4% of the Bank's total assets. The Bank also makes home
equity loans secured by the borrower's principal residence and other types of
consumer loans such as auto loans and home improvement loans. To a lesser
extent, the Bank makes interim construction loans. Although the Bank has a small
number of commercial real estate loans in its portfolio, such loans are not
actively originated by the Bank and accounted for only 1.9% of the Bank's net
loan portfolio at September 30, 1997. In addition to its lending activities and
investments in mortgage-backed securities, the Bank invests in securities issued
by the U.S. Government and its agencies.
On September 29, 1992, the Bank completed its public offering for 164,487
shares of its common stock as part of the Bank's conversion (the "Conversion")
from an Illinois chartered mutual savings and loan association to an Illinois
chartered stock savings and loan association. The net proceeds from the
Conversion amounted to over $1.3 million. The Bank converted from an
Illinois-chartered stock savings and loan association to an Illinois-chartered
stock savings bank in 1994.
<PAGE>
The Bank's and the Company's main office is located at 601-617 Court Street,
Pekin, Illinois 61554. The telephone number at that address is (309) 347-5101.
MARKET AREA
The Bank's primary market area is comprised of Tazewell and Mason
counties, which the Bank serves through its main office in Pekin and one
branch in Manito, Illinois. Tazewell and Mason counties are located along the
Illinois River. Tazewell County is one of the three counties included in the
Greater Peoria Metropolitan Statistical Area, which has a population of
approximately 340,000. The combined population of Tazewell and Mason counties
is approximately 139,000. The major employers of Tazewell and Mason county
residents are engaged in heavy and light manufacturing, construction,
agriculture and medical services. These employers include the main
manufacturing facilities and headquarters of Caterpillar, Inc., located in
northern Tazewell county and across the Illinois River in Peoria,
respectively, and the manufacturing facilities of Diamond Star Motors, Inc.
located east of Tazewell County in McLean County, Illinois. Other major
employers include Airco, Midwest Grain Elevator, Pekin Energy Corporation,
and Pekin Insurance.
BUSINESS STRATEGY
The Bank's current business strategy is to continue to operate as a
well-capitalized, profitable and independent community financial institution
dedicated to home ownership and to providing quality service to its customers.
The Bank intends to implement this strategy by: (1) providing quality customer
service by closely monitoring the needs of its customers; (2) emphasizing the
origination of residential mortgage loans and consumer loans and by offering
other personal services; (3) reducing interest rate risk exposure by better
matching asset and liability maturities and rates; (4) controlling operating
costs; (5) improving asset quality; and (6) maintaining capital in excess of
regulatory requirements while controlling growth.
LENDING ACTIVITIES
GENERAL. The Bank's loan portfolio consists primarily of conventional
mortgage loans secured by one- to four-family residences. At September 30,
1997, the Bank's gross loan portfolio totalled $58.5 million, of which $46.8
million, or 80.0% consisted of one-to four-family residential mortgage loans.
The remainder of the Bank's loan portfolio at such date consisted of consumer
loans (17.4%) and apartment real estate loans and non-residential real estate
loans (2.6%). Historically, the principal lending activity of the Bank has
been the origination of mortgage loans for the purpose of financing or
refinancing one- to four-family residential properties in the Bank's primary
market area. Recently, the Bank's lending activities have been directed to
one- to four-family residential loan originations and consumer loans.
Overall, retained loan originations had declined since 1988 because the Bank
sought to improve its capital ratios by limiting growth and to increase its
investments in mortgage-backed securities and other U.S. Government and
federal agency securities that have shorter average maturities and a lower
risk weighting than residential mortgage loans for regulatory capital
purposes. As a result of the capital raised in the Conversion, however, the
Bank has increased the amount of loans that it retains in its loan portfolio.
The Bank began selling real estate "on contract" in 1984 as a way to
accelerate the disposition of real estate owned ("REO"). Under this program, the
Bank makes installment sales of REO to purchasers but retains title to the REO.
Under the installment contract, the purchaser makes payments over a period of up
to 30 years. While most of the real estate contracts have 30-year terms, the
Bank is currently selling its REO pursuant to contracts providing for shorter
terms. After the sales, expenses related to holding such REO such
2
<PAGE>
as taxes, utilities and insurance are assumed by the purchaser. Until 1989,
real estate sold on contract was 100% financed by the Bank. Since 1989, the
Bank generally has required a 10% downpayment. In selling real estate "on
contract", the Bank uses underwriting standards similar to those used in
originating residential real estate mortgages. Interest rates on real estate
sold on contract generally are below current market rates for a period of
three years, before adjusting to a market rate for the remaining term of the
contract. In recent years, the initial rate has ranged from 8-8 1/2% before
being adjusted to 10 1/2%. As of September 30, 1997, the Bank had $3.0
million of real estate sold on contract. During the year ended September 30,
1997, the average interest rate paid on those contracts was 9.04%. Over 97%
of these related to single family residences. As of September 30, 1997, there
was no real estate sold on contract delinquent more than 90 days.
Since the early 1980s, the Bank has worked to make its interest-earning
assets more interest rate sensitive by originating ARM loans, second mortgage
loans and home equity and other consumer loans. However, the ability of the
Bank to originate ARM loans is substantially affected by market interest
rates and consumer preference for fixed-rate loans in a declining or
relatively low interest rate environment. During the second quarter of fiscal
1996, the Bank began offering 5 and 7 year term balloon mortgage loans. $3.8
million of these term balloon loans were originated during the year ended
September 30, 1997. At September 30, 1997 approximately $1.2 million or 2.1%
of the Bank's net loan portfolio consisted of loans with variable interest
rates and five and seven year balloons.
The Bank continues to actively originate fixed-rate mortgage loans,
generally with 10-, 15- or 30-year terms to maturity secured by one- to
four-family residential properties. One- to four-family fixed-rate loans of
greater than 15-year maturities are generally originated with the expectation
that they will be sold in the secondary mortgage market. The Bank retains
servicing on its sold mortgage loans and realizes monthly service fee income.
The Bank also originates interim construction loans on one- to four-family
residential properties, commercial real estate loans and consumer loans for a
variety of purposes, including home equity loans, home improvement loans and
automobile loans. Construction and commercial real estate lending activity has
been significantly reduced in recent years. The Bank has no present plans to
increase originations of such loans.
3
<PAGE>
ANALYSIS OF LOAN PORTFOLIO
Set forth below is selected data relating to the composition of the Bank's
loan portfolio by type of loan and type of security on the dates indicated.
<TABLE>
<CAPTION>
AT SEPTEMBER 30,
------------------------------------------
1997 1996
-------------------- --------------------
AMOUNT % AMOUNT %
--------- --------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Real estate loans:
Loans on existing property............................................... $ 45,075 77.8% $ 44,636 80.0%
Participation investment loans purchased................................. 169 .3 195 .4
Insured or guaranteed real estate loans.................................. -- -- 8 --
Real estate sold on contract (1)......................................... 3,022 5.2 3,476 6.2
Consumer loans:
Savings account loans.................................................... 105 .2 149 .3
Installment loans(2)..................................................... 10,082 17.4 7,938 14.2
Less:
Discounts and other...................................................... 293 .5 406 .7
Loan loss reserve........................................................ 223 .4 218 .4
--------- --------- --------- ---------
Total loans net........................................................ $ 57,937 100.0% $ 55,778 100.0%
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
- ------------------------
(1) In this type of financing the borrower does not have title to the property;
rather, title remains with the institution.
(2) Includes home equity loans, second mortgage loans, and auto loans.
<TABLE>
<CAPTION>
AT SEPTEMBER 30,
------------------------------------------
1997 1996
-------------------- --------------------
AMOUNT % AMOUNT %
--------- --------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Type of Security:
Residential real estate:
Single family............................................................ $ 46,706 80.6% $ 46,380 83.2%
Two- to four-family...................................................... 54 .1 81 .1
Other dwelling units..................................................... 388 .7 694 1.2
Commercial real estate..................................................... 1,118 1.9 1,160 2.1
Savings accounts........................................................... 105 .2 149 .3
Automobiles................................................................ 1,091 1.9 973 1.7
Other...................................................................... 8,991 15.5 6,965 12.5
Less:
Discounts and other...................................................... 293 .5 406 .7
Loan loss reserve........................................................ 223 .4 218 .4
--------- --------- --------- ---------
Total.................................................................. $ 57,937 100.0% $ 55,778 100.0%
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
4
<PAGE>
LOAN MATURITY SCHEDULE
The following table sets forth certain information at September 30, 1997,
regarding the dollar amount of gross loans maturing in the Bank's portfolio
based on their contractual terms to maturity. Demand loans, loans having no
stated schedule of repayments and no stated maturity, and overdrafts are
reported as due in one year or less. Adjustable and floating-rate loans are
included in the period in which interest rates are next scheduled to adjust
rather than in the period in which they mature, and fixed rate loans are
included in the period in which the final contractual repayment is due.
<TABLE>
<CAPTION>
WITHIN 1-3 3-5 5-10 10-20 OVER
1 YEAR YEARS YEARS YEARS YEARS 20 YEARS TOTAL
--------- --------- --------- --------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
Real Estate:
Adjustable............................. $ 1,073 $ 141 $ -- $ 5 $ -- $ -- $ 1,219
Fixed.................................. 246 823 4,731 9,516 21,989 9,742 47,047
Consumer................................. 998 1,521 1,633 4,683 1,352 -- 10,187
--------- --------- --------- --------- --------- ----------- ---------
Total.................................... $ 2,317 $ 2,485 $ 6,364 $ 14,204 $ 23,341 $ 9,742 $ 58,453
--------- --------- --------- --------- --------- ----------- ---------
--------- --------- --------- --------- --------- ----------- ---------
</TABLE>
Set forth below is a table showing the Bank's loan origination, purchase and
sales activity for the periods indicated.
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
------------------------
<S> <C> <C>
1997 1996
----------- -----------
(IN THOUSANDS)
Loans originated:
Conventional real estate loans:
Loans on existing property.............................. $ 11,585 $ 17,388
Loans refinanced........................................ 4,135 4,689
Real estate sold on contract.............................. 39 19
Installment/Consumer loans................................ 7,800 6,219
--------- ---------
Total loans originated................................ $ 23,559 $ 28,315
--------- ---------
--------- ---------
Loans purchased:
Participation loans....................................... -- --
--------- ---------
Total loans purchased................................. $ -- $ --
--------- ---------
--------- ---------
Loans sold:
Whole loans............................................... 5,775 6,620
--------- ---------
Total loans sold...................................... $ 5,775 $ 6,620
--------- ---------
--------- ---------
</TABLE>
RESIDENTIAL REAL ESTATE LOANS. The Bank's primary lending activity consists
of the origination of one-to four-family, owner-occupied, residential mortgage
loans secured by property located in the Bank's primary market area. The Bank
currently offers residential mortgage loans for terms of from 5 to 30 years, and
with adjustable or fixed interest rates. The interest rate as of September 30,
1997 on fixed 10, 15 and 30 year mortgage loans was 7.25%, 7.50% and 7.875%,
respectively. The interest rate at September 30, 1997 on fixed 5 and 7 year term
balloon mortgage loans was 7.50% and 7.75%, respectively. Origination of
fixed-rate mortgage loans versus ARM loans is monitored on an ongoing basis and
is affected significantly by the level of market interest rates, customer
preference, and loan products offered by the Bank's
5
<PAGE>
competitors. Therefore, even if management's strategy is to emphasize ARM
loans, market conditions may be such that there is greater demand for
fixed-rate mortgage loans, including the 5 and 7 year balloon loans.
The Bank's fixed-rate loans of more than 15-year maturities are originated
with the expectation that they will be resold in the secondary mortgage market.
Fixed-rate loans of 15 years or less may be retained in the Bank's loan
portfolio based on market conditions. The Bank's fixed-rate mortgage loans are
amortized on a monthly basis with principal and interest due each month.
Residential real estate loans often remain outstanding for significantly shorter
periods than their contractual terms because borrowers may refinance or prepay
loans at their option.
Since 1989, the Bank's policy has been to attempt to sell nearly all of its
fixed-rate single family residential loan originations in the secondary mortgage
market through FHLMC programs. This has enabled the Bank to generate origination
fee and servicing fee income without increasing the total asset size of the
Bank. The Bank sells loans to FHLMC and retains servicing on such loan
originations for which the Bank retains a fee of .25% of the stated interest
rate of the mortgage loan sold. The Bank is subject to the risk that
fluctuations in market interest rates between the date the loan is originated
and the date the loan is sold may make it infeasible to sell such loan
originations to FHLMC and other secondary market purchasers. Such unsold loan
originations may need to be retained in the Bank's loan portfolio.
The primary purpose of offering ARM loans is to make the Bank's loan
portfolio more interest rate sensitive. However, as the interest income
earned on ARM loans varies with prevailing interest rates, such loans do not
offer the Bank predictable cash flows as would long-term, fixed-rate loans.
ARM loans carry increased credit risk associated with potential higher
monthly payments by borrowers as general market interest rates increase. It
is possible, therefore, that during periods of rising interest rates, the
risk of default on ARM loans may increase due to the upward adjustment of
interest costs to the borrower.
The Bank's ARM loans adjust annually with interest rate adjustment
limitations of 1 percentage point per year and 5 percentage points over the life
of the loan. The interest rate on the Bank's ARM loans does not adjust downward
below the initial interest rate. The interest rate on ARM loans is based on the
one-year U.S. Treasury Constant Maturity Index plus a 2% margin. In the past,
the Bank has also used the Seventh District Monthly Average Cost of Funds as an
index for its ARM loans. Since the Bank has used different indices for its ARM
loans, such as the Seventh District Monthly Average Cost of Funds Index, the
adjustments in the Bank's portfolio of ARM loans tend not to reflect any one
particular change in any specific interest rate index, but rather general
interest rate trends overall. The Bank's policy is to qualify borrowers for ARM
loans based on the initial rate of the ARM loan. ARM loans totaled approximately
$1.2 million, or 2.1% of the Bank's total net loan portfolio at September 30,
1997.
The Bank's residential first mortgage loans customarily include due-on-sale
clauses, which are provisions giving the Bank the right to declare a loan
immediately due and payable in the event, among other things, that the borrower
sells or otherwise disposes of the underlying real property serving as security
for the loan. Due-on-sale clauses are an important means of adjusting the rates
on the Bank's fixed-rate mortgage loan portfolio, and the Bank has generally
exercised its rights under these clauses.
Regulations limit the amount that a savings association may lend in
relationship to the appraised value of the real estate securing the loan, as
determined by an appraisal at the time of loan origination. Such regulations
permit a maximum loan-to-value ratio of 100% for residential property and 90%
for all other real estate loans. The Bank's lending policies, however, generally
limit the maximum loan-to-value ratio on both
6
<PAGE>
fixed-rate and ARM loans to 80% of the lesser of the appraised value or the
purchase price of the property to serve as security for the loan.
The Bank occasionally makes real estate loans with loan-to-value ratios in
excess of 80%. For real estate loans with loan-to-value ratios of between 80%
and 95%, the Bank requires the first 35% of the loan to be covered by private
mortgage insurance. The Bank does not make real estate loans with loan-to-value
ratios in excess of 95%. The Bank requires fire and casualty insurance, as well
as title insurance or an opinion of counsel regarding good title, on all
properties securing real estate loans made by the Bank.
COMMERCIAL REAL ESTATE LOANS. The Bank has always been selective in
originating commercial real estate loans. Loans secured by commercial real
estate constituted approximately $1,118,000, or 1.9%, of the Bank's net loan
portfolio at September 30, 1997. The Bank's permanent commercial real estate
loans are secured by improved property such as offices, small business
facilities, buildings, warehouses and other non-residential buildings, all of
which are located in the Bank's primary market area and all of which are to be
used or occupied by the borrowers. Commercial real estate loans are offered as
five- or seven-year balloon loans, amortized over 30 years. The Bank generally
does not originate commercial real estate construction loans or land loans.
The Bank's policy is to limit commercial real estate loans to principal
balances not exceeding its loan-to-one borrower limit which was $500,000 at
September 30, 1997. At September 30, 1997, the Bank's largest commercial real
estate loan had a principal outstanding balance of $308,000 and was made to
finance rental units located in Pekin.
Loans secured by commercial real estate generally involve a greater degree
of risk than residential mortgage loans and carry larger loan balances. This
increased credit risk is a result of several factors, including the
concentration of principal in a limited number of loans and borrowers, the
effects of general economic conditions on income producing properties and the
increased difficulty of evaluating and monitoring these types of loans.
Furthermore, the repayment of loans secured by multifamily and commercial real
estate is typically dependent upon the successful operation of the related real
estate project. If the cash flow from the project is reduced, the borrower's
ability to repay the loan may be impaired.
CONSUMER LOANS. Illinois-chartered savings institutions are authorized
to make secured and unsecured consumer loans in an aggregate amount up to 30%
of their assets. In addition, the Bank has lending authority above the 30%
category for certain consumer loans, such as equity loans, home property
improvement loans, and loans secured by savings accounts.
As of September 30, 1997, net consumer loans totalled $10.0 million, or
17.3%, of the Bank's net loan portfolio. The principal types of consumer loans
offered by the Bank are equity loans, auto loans, home improvement loans, and
loans secured by deposit accounts. Home equity loans and second mortgage loans
are originated on a fixed-rate basis only and have terms up to 15 years. The
Bank's home equity loans and second mortgage loans are generally secured by the
borrower's principal residence and a personal guarantee. At September 30, 1997,
home equity loans and home improvement loans totalled $8.2 million, or 82.5% of
net consumer loans. Auto loans are originated on a fixed-rate basis with terms
of up to 7 years, and passbook loans charge interest only at 2 1/2% above the
rate being paid on the savings account securing the loan and have terms no
longer than the terms of the underlying certificates of deposit.
The underwriting standards employed by the Bank for consumer loans include a
determination of the applicant's credit history and an assessment of the
applicant's ability to meet existing obligations and
7
<PAGE>
payments on the proposed loan. The stability of the applicant's monthly
income may be determined by verification of gross monthly income from primary
employment, and additionally from any verifiable secondary income.
Creditworthiness of the applicant is of primary consideration. However, the
underwriting process also includes a comparison of the value of the security
in relation to the proposed loan amount.
The Bank intends to continue to increase consumer loan originations in the
future by actively cross-selling consumer loan products and services to existing
customers, and advertising consumer loan products in its market area. Consumer
loans tend to have higher interest rates than residential mortgage loans, but
also tend to have a higher risk of default than residential mortgage loans.
Management believes that the Bank's loan loss experience in connection with
consumer loans is favorable. See "Non-Performing Assets" and "Classified Assets"
for information regarding the Bank's loan loss experience and reserve policy.
CONSTRUCTION LOANS. The Bank occasionally originates loans to finance the
construction of owner-occupied residential property. At September 30, 1997, the
Bank had none of its net loan portfolio invested in interim construction loans.
The Bank makes construction loans to private individuals. Construction loans
generally are made with either adjustable or fixed-rate terms of up to twelve
months. Loan proceeds are disbursed in increments as construction progresses and
as inspections warrant. Construction loans are structured to be converted to
permanent loans originated by the Bank at the end of the construction period or
upon receiving permanent financing from another financial institution.
LOAN SOLICITATION AND PROCESSING. Loan originations are derived from a
number of sources such as real estate broker referrals, existing customers,
borrowers, builders, attorneys and walk-in customers. Upon receipt of a loan
application, a credit report is made to verify specific information relating to
the applicant's employment, income, and credit standing. In the case of a real
estate loan, an appraisal of the real estate intended to secure the proposed
loan is undertaken by an independent appraiser approved by the Bank. A loan
application file is first reviewed by the Bank's loan department and then
submitted for approval to a loan committee consisting of five senior officers of
the Bank and subsequently ratified by the full Board of Directors. One- to
four-family residential mortgage loans with principal balances in excess of
$150,000 must be approved by the Executive Committee and all multi-family and
commercial real estate loans must be submitted by the loan committee directly to
the Board of Directors for approval. Appraisals on real estate underlying most
real estate loans in excess of $250,000 must be performed by either state-
licensed or state-certified appraisers, depending on the type and size of the
loan. Once the Board of Directors ratifies or approves a loan, a loan commitment
is promptly issued to the borrower.
If the loan is approved, a commitment is given which specifies the terms and
conditions of the proposed loan including the amount of the loan, interest rate,
amortization term, a brief description of the required collateral, and required
insurance coverage. The borrower must provide proof of fire and casualty
insurance on the property serving as collateral which insurance must be
maintained during the full term of the loan. Title insurance or an attorney's
opinion based on a title search of the property is required on all loans secured
by real property.
LOAN ORIGINATION, SERVICING, AND OTHER FEES. All loans in the Bank's
portfolio at September 30, 1997, other than $169,000 of commercial loan
participations, were originated by the Bank. In addition to interest earned on
loans, the Bank generally receives loan origination fees. The Financial
Accounting Standards Board ("FASB") in December 1986 issued SFAS No. 91 on the
accounting for non-refundable fees and costs associated with originating or
acquiring loans. To the extent that loans are originated or acquired for the
Banks's portfolio, SFAS No. 91 requires that the Bank defer loan origination
fees and costs and amortize such amounts as an adjustment of yield over the life
of the loan by use of the level yield method.
8
<PAGE>
SFAS No. 91 applies to fiscal years beginning after December 15, 1987. SFAS
No. 91 reduces the amount of revenue recognized by many financial
institutions at the time such loans are originated or acquired. Because SFAS
No. 91 affects the timing of loan fee income, it is not expected to have an
effect on income over an extended period of time. Fees deferred under SFAS
No. 91 are recognized into income immediately upon the sale of the related
loan. At September 30, 1997, the Bank had $145,000 of deferred loan fees.
Loan origination fees are volatile sources of income. Such fees vary with the
volume and type of loans made and with competitive conditions in the mortgage
markets, which in turn respond to the demand and availability of money.
In addition to loan origination fees, the Bank also receives other fees and
service charges which consist primarily of late charges and loan servicing fees
on loans sold. At September 30, 1997, the Bank was servicing loans with a
balance of $20.6 million, as to which it generally receives fees at an annual
rate of .25% to .375%. The Bank also receives fees in connection with credit
cards it offers.
LOANS TO ONE BORROWER. Current law and regulations limit loans to one
borrower in an amount equal to 15% of unimpaired capital and unimpaired surplus
on an unsecured basis, and an additional amount equal to 10% of unimpaired
capital and unimpaired surplus if the loan is secured by readily marketable
collateral (generally, financial instruments and bullion, but not real estate).
The Bank's maximum loan to one borrower limit was $500,000 at September 30,
1997. The Bank currently is in compliance with its loans-to-one borrower
limitations.
DELINQUENCIES. The Bank's collection procedures provide that when a real
estate loan is 20 days' past due (10 days for consumer loans), a late charge is
added and the borrower is contacted by mail and payment is requested. If the
delinquency continues, subsequent efforts are made to contact the delinquent
borrower. Additional late charges may be added and, if the loan continues in a
delinquent status for 90 days or more, the Bank generally initiates foreclosure
proceedings.
NON-PERFORMING ASSETS. The Bank reviews delinquent or non-performing loans
on a regular basis. Management does not place delinquent or impaired loans on
non-accrual status, but rather establishes reserves against the uncollected
interest when a loan is 90 days or more past due and the loan is deemed
uncollectible, the effect of which is to not recognize interest income on the
loan until the loan is made current. Foreclosure proceedings generally are
initiated shortly thereafter.
Real estate acquired by the Bank as a result of foreclosure or by deed in
lieu of foreclosure is classified as real estate owned until such time as it is
sold. When REO is acquired, it is recorded at the lower of the unpaid principal
balance of the related loan or its fair market value. Any write-down of REO is
charged to the allowance for real estate losses. At September 30, 1997, the Bank
had no property acquired as the result of foreclosure or by deed in lieu of
foreclosure and classified as REO.
9
<PAGE>
The following table sets forth information regarding non-performing assets
at the dates indicated. At September 30, 1997, the Bank had no restructured
loans within the meaning of SFAS No. 15, as amended, or potential problem loans.
<TABLE>
<CAPTION>
AT SEPTEMBER 30,
--------------------
1997 1996
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
Impaired loans: (1)
Residential real estate....................................... $ 458 $ 108
Consumer...................................................... 6 1
--------- ---------
Total....................................................... 464 109
--------- ---------
--------- ---------
Percentage of total loans....................................... .80% .20%
--------- ---------
--------- ---------
Real estate owned(2)............................................ $ -- $ 128
--------- ---------
--------- ---------
Total non-performing assets..................................... $ 464 $ 237
--------- ---------
--------- ---------
Percentage of total assets...................................... .54% .28%
--------- ---------
--------- ---------
</TABLE>
- ------------------------
(1) During the years ended September 30, 1997 and 1996, the foregone interest
income on loans accounted for on a nonaccrual basis was zero.
(2) Represents the net book value of property acquired by the Bank through
foreclosure or deed in lieu of foreclosure. Upon acquisition, this property
is recorded at the lower of its fair market value less estimated selling
costs or the principal balance of the related loan.
CLASSIFIED ASSETS. Federal regulations provide for the classification of
loans and other assets such as debt and equity securities considered by the FDIC
to be of lesser quality as "substandard," "doubtful" or "loss" assets. An asset
is considered "substandard" if it is inadequately protected by the current net
worth and paying capacity of the obligor or of the collateral pledged, if any.
"Substandard" assets include those characterized by the "distinct possibility"
that the insured institution will sustain "some loss" if the deficiencies are
not corrected. Assets classified as "doubtful" have all of the weaknesses
inherent in those classified "substandard," with the added characteristic that
the weaknesses present make "collection or liquidation in full," on the basis of
currently existing facts, conditions, and values, "highly questionable and
improbable." Assets classified as "loss" are those considered "uncollectible"
and of such little value that their continuance as assets without the
establishment of a specific loss reserve is not warranted. Assets that do not
expose the association to risk sufficient to warrant classification in one of
the aforementioned categories, but which assets possess some weaknesses, are
required to be designated "special mention" by management.
When a savings bank classifies problem assets as either substandard or
doubtful, it is required to establish general allowances for loan losses in an
amount deemed prudent by management. General allowances represent loss
allowances which have been established to recognize the inherent risk associated
with lending activities, but which, unlike specific allowances, have not been
allocated to particular problem assets. When a savings bank classifies problem
assets as "loss," it is required either to establish a specific allowance for
losses equal to 100% of the amount of the assets so classified or to charge off
such amount. The Bank's determination as to the classification of its assets,
and the amount of its valuation allowances is subject to review by the FDIC
which can order the establishment of additional general or specific loss
allowances. The Bank regularly reviews the problem loans in its portfolio to
determine whether any loans require classification in accordance with applicable
regulations.
10
<PAGE>
At September 30, 1997, the aggregate amount of the Bank's classified assets,
and of the Bank's general and specific loss allowances were as follows:
<TABLE>
<CAPTION>
AT SEPTEMBER 30, 1997
-----------------------
<S> <C>
(IN THOUSANDS)
Substandard assets................................... $ 115
Doubtful assets...................................... 349
Loss assets.......................................... --
---------
Total classified assets............................ $ 464
---------
---------
General loss allowances.............................. 223
Specific loss allowances............................. --
---------
Total allowances................................... $ 223
---------
---------
</TABLE>
Classified assets consisted of mortgage loans or consumer loans originated
in the Bank's primary market area.
ALLOWANCE FOR LOAN LOSSES. Management's policy is to provide for estimated
losses on the Bank's loan portfolio based on management's evaluation of the
potential losses that may be incurred. Such evaluation, which includes a review
of all loans of which full collectibility of interest and principal may not be
reasonably assured, considers, among other matters, the estimated net realizable
value of the underlying collateral. During each of 1997 and 1996, the Bank added
$12,000 to the provision for losses on loans. The provision for loan losses for
the year ended September 30, 1997 is attributable to management's current view
of the risks in the Bank's loan portfolio based on an evaluation of specific
loans in its portfolio, estimated collateral values, historical loss experience,
current economic trends and the existing level of the Bank's allowance for loan
losses.
Management will continue to review the entire loan portfolio to determine
the extent, if any, to which further additional loan loss provisions may be
deemed necessary. There can be no assurance that the allowance for loan losses
will be adequate to cover losses which may in fact be realized in the future and
that additional provisions for loan losses will not be required.
11
<PAGE>
ANALYSIS OF THE ALLOWANCE FOR LOAN LOSSES. The following table sets
forth the breakdown of the allowance for loan losses by loan category for the
periods indicated. Management believes that the allowance can be allocated by
category only on an approximate basis. The allocation to the allowance by
category is not necessarily indicative of further losses and does not
restrict the use of the allowance to absorb losses in any category.
<TABLE>
<CAPTION>
AT OR FOR THE YEAR
ENDED
SEPTEMBER 30,
--------------------
1997 1996
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
Types of Loans:
Residential real estate................................................. $ 47,148 $ 47,240
Commercial real estate.................................................. 1,118 1,075
Consumer loans.......................................................... 10,187 8,086
Discounts and reserves.................................................. (516) (624)
--------- ---------
Net loans outstanding................................................. $ 57,937 $ 55,777
--------- ---------
--------- ---------
As a percentage of net loans:
Residential real estate................................................. 81.4% 84.7%
Commercial real estate.................................................. 1.9 1.9
Consumer loans.......................................................... 17.6 14.5
Discounts and reserves.................................................. (.9) (1.1)
--------- ---------
Net loans............................................................. 100.0% 100.0%
--------- ---------
--------- ---------
Average loans outstanding............................................... $ 55,265 $ 51,379
--------- ---------
--------- ---------
Allowance balances (at beginning of period)............................. $ 218 $ 212
Provision for losses:
Residential........................................................... 12 6
Consumer.............................................................. -- 6
Charge-offs:
Residential........................................................... (6) --
Consumer.............................................................. (1) (6)
--------- ---------
Allowance balance (at end of period).................................... $ 223 $ 218
--------- ---------
--------- ---------
Allowance by type of loan:
Residential real estate............................................... $ 201 $ 195
Commercial real estate................................................ -- --
Consumer loans........................................................ 22 23
--------- ---------
Total Allowances...................................................... $ 223 $ 218
--------- ---------
--------- ---------
Allowance for loan losses as a percentage of net loans outstanding...... .38% .39%
Net loans charged off as a percentage of average loans outstanding...... .01% .01%
</TABLE>
12
<PAGE>
ANALYSIS OF THE ALLOWANCE FOR REAL ESTATE OWNED. The following table sets
forth information with respect to the Bank's allowance for losses on real estate
owned at the dates indicated.
<TABLE>
<CAPTION>
AT OR FOR THE YEAR
ENDED
SEPTEMBER 30,
----------------------
<S> <C> <C>
1997 1996
----- ---------
(IN THOUSANDS)
Total real estate owned.................................. $ -- $ 128
---------- ---------
---------- ---------
Allowance balance (at beginning of period)............... $ 8 $ --
Provisions charged to income............................. -- 8
Charge-offs.............................................. (8) --
---------- ---------
Allowance balance (at end of period)..................... $ -- $ 8
---------- ---------
---------- ---------
Allowance for losses on real estate owned
as a percentage of real estate owned................... --% 6.3%
---------- ---------
---------- ---------
</TABLE>
INVESTMENT ACTIVITIES
In recent years, the Bank has sought to decrease the percentage of its
assets invested in mortgage-backed securities and other securities issued or
guaranteed by the U.S. Government or an agency thereof. This decrease has been
due to an increase in the Bank's origination of higher yielding mortgage loans
as the Bank has returned to a more traditional thrift asset portfolio. The
increase in mortgage loans retained in the Bank's portfolio reflects the capital
raised in the Conversion and the improved capital ratios which have enabled the
Bank to reduce liquidity. The Bank's investment securities consist primarily of
mortgage-backed securities issued or guaranteed by FHLMC, FNMA or GNMA, U.S.
Treasury notes, and securities issued by agencies of the U.S. Government.
The Bank is required under federal regulations to maintain a minimum amount
of liquid assets which may be invested in specified short-term securities and
certain other investments. See "Regulation--Federal Regulations--Liquidity
Requirements." The Bank generally has maintained a liquidity portfolio in excess
of regulatory requirements. Liquidity levels may be increased or decreased
depending upon the yields on investment alternatives and upon management's
judgment as to the attractiveness of the yields then available in relation to
other opportunities and its expectation of the level of yield that will be
available in the future, as well as management's projections as to the short
term demand for funds to be used in the Bank's loan origination and other
activities.
13
<PAGE>
The following table sets forth the amortized cost, gross unrealized gains
and losses, and estimated market value for held-to-maturity and
available-for-sale money market investments and investment securities at
September 30, 1997 and 1996.
<TABLE>
<CAPTION>
AT SEPTEMBER 30, 1997
-------------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
----------- ------------- ------------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Held-to-maturity:
Investment securities:
U.S. Governmental agencies.................................... $ 4,487 $ 2 $ (24) $ 4,465
Municipal obligations......................................... 990 28 -- 1,018
Stock in Federal Home Loan Bank, at cost...................... 619 -- -- 619
----------- ------------- ------------- -----------
$ 6,096 $ 30 $ (24) $ 6,102
----------- ------------- ------------- -----------
----------- ------------- ------------- -----------
Available-for-sale:
Money market investments:
Short-term liquidity funds.................................... $ 128 $ -- $ -- $ 128
Investment securities:
U.S. Treasury securities...................................... 2,490 41 (4) 2,527
U.S. Government agencies...................................... 2,499 26 -- 2,525
Mutual funds.................................................. 613 -- (5) 608
----------- ------------- ------------- -----------
$ 5,730 $ 67 $ (9) $ 5,788
----------- ------------- ------------- -----------
----------- ------------- ------------- -----------
</TABLE>
<TABLE>
<CAPTION>
AT SEPTEMBER 30, 1996
----------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
----------- ------------- ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Held-to-maturity:
Investment securities:
U.S. Governmental agencies.................................. $ 5,467 $ -- $ (108) $ 5,359
Municipal obligations....................................... 990 4 (11) 983
Stock in Federal Home Loan Bank, at cost.................... 601 -- -- 601
----------- ------------- ----------- -----------
$ 7,058 $ 4 $ (119) $ 6,943
----------- ------------- ----------- -----------
----------- ------------- ----------- -----------
Available-for-sale:
Money market investments:
Short-term liquidity funds.................................. $ 124 $ -- $ -- $ 124
Investment securities:
U.S. Treasury securities.................................... 2,497 19 (17) 2,499
U.S. Governmental agencies.................................. 999 -- (8) 991
Mutual funds................................................ 577 -- (10) 567
----------- ------------- ----------- -----------
$ 4,197 $ 19 $ (35) $ 4,181
----------- ------------- ----------- -----------
----------- ------------- ----------- -----------
</TABLE>
14
<PAGE>
The following table sets forth the amortized cost, gross unrealized gains
and losses, and estimated market value for held-to-maturity and
available-for-sale mortgage-backed securities at September 30, 1997 and 1996.
<TABLE>
<CAPTION>
AT SEPTEMBER 30, 1997
------------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
----------- ------------- ------------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Held-to-maturity:
FNMA certificates............................................... $ 2,929 $ 33 $ -- $ 2,962
FHLMC certificates.............................................. 2,256 7 (6) 2,257
FNMA interest-only security, net of $62 allowance for loss...... -- -- -- --
----------- ------------- ------------- -----------
$ 5,185 $ 40 $ (6) $ 5,219
----------- ------------- ------------- -----------
----------- ------------- ------------- -----------
Available-for-sale:
FNMA certificates............................................... $ 368 $ 9 $ (1) $ 376
GNMA certificates............................................... 1,992 14 (8) 1,998
FHLMC certificates.............................................. 557 7 -- 564
----------- ------------- ------------- -----------
$ 2,917 $ 30 $ (9) $ 2,938
----------- ------------- ------------- -----------
----------- ------------- ------------- -----------
</TABLE>
<TABLE>
<CAPTION>
AT SEPTEMBER 30, 1996
----------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
----------- ------------- ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Held-to-maturity:
FNMA certificates............................................... $ 3,506 $ 29 $ (29) $ 3,506
FHLMC certificates.............................................. 2,932 1 (71) 2,862
FNMA interest-only security, net of $72 allowance for loss...... -- -- -- --
----------- ------------- ----------- -----------
$ 6,438 $ 30 $ (100) $ 6,368
----------- ------------- ----------- -----------
----------- ------------- ----------- -----------
Available-for-sale:
FNMA certificates............................................... $ 510 $ 9 $ (10) $ 509
GNMA certificates............................................... 3,129 7 (85) 3,051
FHLMC certificates.............................................. 651 1 (11) 641
----------- ------------- ----------- -----------
$ 4,290 $ 17 $ (106) $ 4,201
----------- ------------- ----------- -----------
----------- ------------- ----------- -----------
</TABLE>
15
<PAGE>
INVESTMENT PORTFOLIO MATURITIES
The following table sets forth the scheduled maturities, carrying values and
average yields for the Bank's investment securities classified as
held-to-maturity and available-for-sale at September 30, 1997.
<TABLE>
<CAPTION>
CARRYING VALUE MATURING FOR HELD-TO-MATURITY INVESTMENT SECURITIES
AT SEPTEMBER 30, 1997
-------------------------------------------------------------------------------
ONE YEAR OR LESS ONE TO FIVE YEARS FIVE TO TEN YEARS
------------------------ ------------------------ ------------------------
CARRYING AVERAGE CARRYING AVERAGE CARRYING AVERAGE
VALUE YIELD VALUE YIELD VALUE YIELD
----------- ----------- ----------- ----------- ----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
U.S. Government agencies........ $ 499 7.78% $ 2,498 5.90% $ 1,490 6.39%
Municipal obligations........... -- -- -- -- 890 4.83
Stock in Federal Home Loan
Bank.......................... 619 6.74 -- -- -- --
----------- ----------- ----------- ----------- ----------- -----------
Total....................... $ 1,118 7.20% $ 2,498 5.90% $ 2,380 5.82%
----------- ----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- ----------- -----------
<CAPTION>
MORE THAN TOTAL
TEN YEARS INVESTMENT SECURITIES
--------------------- ------------------------
CARRYING AVERAGE CARRYING AVERAGE
YIELD YIELD VALUE YIELD
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
U.S. Government agencies........ $ -- --% $ 4,487 6.27%
Municipal obligations........... 100 5.60 990 4.91
Stock in Federal Home Loan
Bank.......................... -- -- 619 6.74
---------- ----------- ----------- -----------
Total........................ $ 100 5.60% $ 6,096 6.10%
---------- ----------- ----------- -----------
---------- ----------- ----------- -----------
</TABLE>
<TABLE>
<CAPTION>
ESTIMATED MARKET VALUE MATURING FOR AVAILABLE-FOR-SALE INVESTMENT SECURITIES
AT SEPTEMBER 30, 1997
----------------------------------------------------------------------------
ONE YEAR OR LESS ONE TO FIVE YEARS FIVE TO TEN YEARS TEN YEARS
------------------------ ------------------------ ------------------------ -----------
CARRYING AVERAGE CARRYING AVERAGE CARRYING AVERAGE CARRYING
VALUE YIELD VALUE YIELD VALUE YIELD VALUE
----------- ----------- ----------- ----------- ----------- ----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasury securities.......... $ 499 5.13% $ 1,517 6.29% $ 511 6.50% $ --
U.S. Government agencies.......... -- -- 503 6.91 1,521 7.25 501
Money market investments/ mutual
funds (no stated maturity)...... 736 5.85 -- -- -- -- --
----------- ----------- ----------- ----------- ----------- ----------- -----------
Total....................... $ 1,235 5.56% $ 2,020 6.45% $ 2,032 7.07% $ 501
----------- ----------- ----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- ----------- ----------- -----------
<CAPTION>
MORE THAN TOTAL
TEN YEARS INVESTMENT SECURITIES
------------------------ -----------------------
CARRYING AVERAGE CARRYING AVERAGE
VALUE YIELD VALUE YIELD
------------ ----------- ----------- ----------
<S> <C> <C> <C> <C>
U.S. Treasury securities.......... $ -- --% $ 2,527 6.10%
U.S. Government agencies.......... 501 7.75 2,525 7.28
Money market investments/ mutual
funds (no stated maturity)...... -- -- 736 5.85
------------ ----------- ----------- ----------
Total....................... $ 501 7.75% $ 5,788 6.58%
------------ ----------- ----------- ----------
------------ ----------- ----------- ----------
</TABLE>
16
<PAGE>
SUBSIDIARY ACTIVITIES
The Bank's only service corporation subsidiary--Pekin Financial Service
Corporation (the "Service Corporation") was incorporated in March 1988, as an
Illinois corporation. The Service Corporation is a wholly-owned subsidiary of
the Bank. The principal business of the Service Corporation is the sale of
annuities. However, in October 1993, the Service Corporation began to offer
travel agency services to the public. The Service Corporation reported net
income of $42,000 for the year ended September 30, 1997 and $50,000 for the year
ended September 30, 1996. The Bank's investment in the Service Corporation was
$5,000 at September 30, 1997, and the Service Corporation had total assets and
net worth of $426,000 and $275,000, respectively, at that date.
Under FIRREA, SAIF-insured institutions are required to provide 30 days'
advance notice to the FDIC before establishing or acquiring a subsidiary or
conducting a new activity in a subsidiary. The insured institution must also
provide the FDIC such information as may be required by applicable regulations
and must conduct the activity in accordance with the rules and orders of the
FDIC. In addition to other enforcement and supervision powers, the FDIC may
determine after notice and opportunity for a hearing that the continuation of a
savings association's ownership of or relation to a subsidiary (i) constitutes a
serious risk to the safety, soundness or stability of the savings association,
or (ii) is inconsistent with the purposes of FIRREA. Upon the making of such a
determination, the FDIC may order the savings bank to divest the subsidiary or
take other actions.
SOURCES OF FUNDS
GENERAL. Deposits are the major source of the Bank's funds for lending
and other investment purposes. In addition to deposits, the Bank derives
funds from the amortization and prepayment of loans and mortgage-backed
securities, the sale or maturity of investment securities, the sale of assets
held for sale and mortgage-backed securities, operations and, if needed,
advances from the FHLB of Chicago. Scheduled loan principal repayments are a
relatively stable source of funds, while deposit inflows and outflows and
loan prepayments are significantly influenced by general interest rates and
market conditions. Borrowings may be used on a short-term basis to compensate
for reductions in the availability of funds from other sources or on a longer
term basis for general business purposes.
DEPOSITS. Consumer and commercial deposits are attracted principally from
within the Bank's primary market area through the offering of a broad selection
of deposit instruments including NOW, regular savings, club savings, money
market deposits, term certificate accounts and individual retirement accounts.
Deposit account terms vary according to the minimum balance required, the time
periods the funds must remain on deposit and the interest rate, among other
factors. The Bank regularly evaluates the internal cost of funds, surveys rates
offered by competing institutions, reviews the Bank's cash flow requirements for
lending and liquidity and executes rate changes when deemed appropriate. The
Bank does not obtain funds through brokers, nor does it actively solicit funds
outside its primary market area.
The Bank does not offer premiums to attract or retain deposits. Because of a
decline in market interest rates generally, the Bank has been able to lower the
interest rates on its deposit accounts, thereby lowering its cost of funds. In
addition, the Bank currently does not offer 3-month and 6-month certificates of
deposit resulting in lower-cost deposits as investors have rolled-over funds
into lower-yielding passbook savings accounts and money market funds.
17
<PAGE>
Certificates of deposit with principal amounts of $100,000 or more
constituted $3.6 million, or 5.3% of the Bank's total deposits at September
30, 1997. These deposits include deposits from various entities and
individuals. These deposits may be more volatile than other deposit accounts
and may impact the Bank's cost of funds, liquidity and funds available for
lending if one or more depositors withdraw their funds from the Bank.
SAVINGS PORTFOLIO
Savings deposits in the Bank as of September 30, 1997, were represented
by the various types of savings programs described below.
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE PERCENTAGE
INTEREST MINIMUM MINIMUM OF TOTAL
RATE TERM CATEGORY AMOUNT BALANCE SAVINGS
- --------- ------ -------------------------- ---------- ---------- ----------
(IN THOUSANDS)
<C> <S> <S> <S> <S> <S>
Demand Accounts
---------------
.92% None NOW Accounts $100 $3,604 5.2%
2.48% None Passbook and Club Accounts 1 8,007 11.5
2.99% None Money Market Accounts 2,500 4,085 5.9
------ -----
$15,696 22.6%
------- -----
Certificates of Deposit
-----------------------
2.51 6 months Fixed term, fixed rate 500 22 .1
5.73 12 months Fixed term, fixed rate 500 13,921 20.1
5.70 24 months Fixed term, fixed rate 500 7,135 10.3
6.13 36 months Fixed term, fixed rate 500 3,299 4.8
6.32 48 months Fixed term, fixed rate 500 2,182 3.2
6.17 60 months Fixed term, fixed rate 500 20,712 30.0
2.53 96 months Fixed term, fixed rate 500 114 .2
5.83 18 months IRA 500 5,978 8.7
------ ----
53,363 77.4
------ ----
$69,059 100.0%
------- -----
------- -----
</TABLE>
CERTIFICATES OF DEPOSIT BY RATES. The following table sets forth the
certificates of deposit of the Bank classified by rates as of the dates
indicated.
<TABLE>
<CAPTION>
AT SEPTEMBER 30,
--------------------
<S> <C> <C>
1997 1996
--------- ---------
<CAPTION>
(IN THOUSANDS)
2.50--6.00% ................ $ 31,485 $ 35,969
6.01--8.00% ................ 21,878 14,815
--------- ----------
$ 53,363 $ 50,784
--------- ----------
--------- ----------
</TABLE>
18
<PAGE>
CERTIFICATES OF DEPOSIT MATURITY SCHEDULE. The following table sets
forth the amount and maturities of the Bank's certificates of deposit at
September 30, 1997.
<TABLE>
<CAPTION>
AMOUNT DUE
--------------------
LESS THAN 1-2 2-3 AFTER
ONE YEAR YEARS YEARS 3 YEARS TOTAL
----------- --------- --------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
2.50--6.00% ........ $ 23,789 $ 6,185 $ 459 $ 1,052 $ 31,485
6.01--8.00% ........ 9,120 5,316 4,500 2,942 21,878
-------- -------- ------- ------- --------
$ 32,909 $ 11,501 $ 4,959 $ 3,994 $ 53,363
-------- -------- ------- ------- --------
-------- -------- ------- ------- --------
</TABLE>
CERTIFICATES OF DEPOSIT. The following table indicates the amount of the
Bank's certificates of deposit of $100,000 or more by time remaining until
maturity as of September 30, 1997.
<TABLE>
AT SEPTEMBER 30, 1997
(IN THOUSANDS)
---------------------
<S> <C>
Three months or less........................................ $ --
Three through six months.................................... 920
Six through twelve months................................... 858
Over twelve months.......................................... 1,859
----------
Total............................................. $ 3,637
----------
----------
</TABLE>
SAVINGS DEPOSIT ACTIVITY. The following table sets forth the savings
activities of the Bank for the years indicated:
<TABLE>
<CAPTION>
AT SEPTEMBER 30,
--------------------
1997 1996
--------- ---------
<CAPTION>
(IN THOUSANDS)
<S> <C> <C>
Deposits.......................................... $ 87,465 $ 76,729
Withdrawals....................................... 88,336 78,947
Net decrease before interest credited........... (871) (2,218)
Interest credited................................. 2,607 2,628
--------- ---------
Net increase in savings deposits................ $ 1,736 $ 410
--------- ---------
--------- ---------
</TABLE>
In the unlikely event of liquidation of the Bank, depositors will be
entitled to full payment of their deposit accounts prior to any payment being
made to the stockholders of the Bank. Substantially all of the Bank's
depositors are residents of Illinois.
BORROWINGS. Savings deposits are the primary source of funds of the
Bank's lending and investment activities and for its general business
purposes. The Bank, if the need arises, may rely upon advances from the FHLB
of Chicago and the Federal Reserve Bank discount window to supplement its
supply of lendable funds and to meet deposit withdrawal requirements.
Advances from the FHLB are typically secured by the Bank's stock in the FHLB
and a portion of the Bank's first mortgage loans. At September 30, 1997, the
19
<PAGE>
Bank had $8.0 million in advances outstanding from the FHLB. The Bank does
not have any other short-term or long-term borrowings outstanding.
The FHLB functions as a central reserve bank providing credit for the
Bank and other member savings associations and financial institutions. As a
member, the Bank is required to own capital stock in the FHLB and is
authorized to apply for advances on the security of such stock and certain of
its home mortgages provided certain standards related to creditworthiness
have been met. Advances are made pursuant to several different programs. Each
credit program has its own interest rate and range of maturities. Depending
on the program, limitations on the amount of advances are based either on a
fixed percentage of a member institution's net worth or on the FHLB's
assessment of the institution's creditworthiness.
COMPETITION
The Bank encounters strong competition both in attracting deposits and in
originating real estate and other loans. Its most direct competition for
deposits has come historically from commercial banks, other savings
associations, brokerage firms, and a large credit union in its market area,
and the Bank expects continued strong competition from such financial
institutions in the foreseeable future. The Bank's market area includes
branches of several commercial banks which are substantially larger than the
Bank in terms of state-wide deposits. The Bank competes for savings by
offering depositors a high level of personal service together with a range of
financial services. The competition for real estate and other loans comes
principally from commercial banks, mortgage banking companies, credit unions
and other savings associations. The Bank competes for loans primarily through
the interest rates and loan fees it charges and the efficiency and quality of
services it provides borrowers, real estate brokers and builders. Factors
that affect competition include general and local economic conditions,
current interest rate levels and volatility of the mortgage markets.
Based on total assets, at September 30, 1997, the Bank was the second
largest savings institution headquartered in its market area, consisting of
Mason and Tazewell counties.
REGULATION
The Bank is an Illinois-chartered savings bank and its deposit accounts
are insured up to applicable limits by the Federal government under the SAIF
of the FDIC. The Bank is subject to extensive regulation by the Illinois
Office of the Commissioner of Banks and Trust Companies (the "Commissioner")
and the FDIC. The Bank must file reports with the Commissioner and the FDIC
concerning its activities and financial condition, in addition to obtaining
regulatory approvals prior to entering into certain transactions such as
mergers or acquisitions with other depository institutions. There are
periodic examinations of the Bank by the Commissioner and the FDIC to review
the Bank's compliance with various regulatory requirements. The Bank is also
subject to certain reserve requirements established by the Board of Governors
of the Federal Reserve (the "FRB"). The Company, as a bank holding company,
is also subject to regulation by the FRB and will be required to file reports
to the FRB. This regulation and supervision establishes a comprehensive
framework of activities in which a savings bank can engage and is intended
primarily for the protection of the SAIF and depositors. The regulatory
structure also gives the regulatory authorities extensive discretion in
connection with their supervisory and enforcement activities and examination
policies, including policies with respect to the classification of assets and
the establishment of adequate loan loss reserves for regulatory purposes. Any
change in such regulation, whether by the
20
<PAGE>
Commissioner, the FDIC, the FRB or Congress could have a material impact on
the operations of the Bank or the Company.
ILLINOIS SAVINGS BANK AND SAVINGS BANK HOLDING COMPANY LAW AND REGULATION
In August 1990, Illinois enacted the Savings Bank Act ("SBA"), which
establishes Illinois-chartered savings banks. Under the SBA, savings banks
are chartered and regulated by the Commissioner and possess all of the powers
of federal and Illinois-chartered savings and loan associations.
As an Illinois-chartered savings bank, the Bank is subject to regulation
and supervision by the Commissioner. This regulation covers, among other
things, the Bank's internal organization (i.e., charter, bylaws, capital
requirements, transactions with directors and officers, and composition of
the board of directors), as well as supervision of permissible activities and
mergers and acquisitions. The Bank is required to file periodic reports with,
and is subject to periodic examinations at least once within every 18-month
period by, the Commissioner. The lending and investment authority of the Bank
is prescribed by Illinois law and regulations, as well as applicable Federal
laws and regulations, and the Bank is prohibited from engaging in any
activities not permitted by such laws and regulations.
Under Illinois law, savings banks are required to maintain a minimum core
capital to total assets ratio of 3%. The Commissioner is authorized to
require a savings bank to maintain a higher minimum capital level if the
Commissioner determines that the savings bank's financial condition or
history, management or earnings prospects are not adequate. If a savings
bank's core capital ratio falls below the required level, the Commissioner
may direct the savings bank to adhere to a specific written plan established
by the Commissioner to correct the savings bank's capital deficiency, as well
as a number of other restrictions on the savings bank's operations, including
a prohibition on the declaration of dividends by the savings bank's board of
directors. As a matter of policy, the Commissioner requires that savings
associations that convert to savings banks under the SBA have a minimum core
capital to assets ratio of 6%. At September 30, 1997, the Bank's regulatory
core capital ratio was 8.4% of total adjusted assets, which exceeded the
required amount.
Under Illinois law, a savings bank may make both secured and unsecured
loans. However, loans for business, corporate, commercial or agricultural
purposes, whether secured or unsecured, may not in the aggregate exceed 15%
of a savings bank's total assets unless authorized by the Commissioner. With
the prior written consent of the Commissioner, savings banks may also engage
in real estate development activities, provided that the total investment in
any one project may not exceed 15% of total capital, and the total investment
in all projects may not exceed 50% of total capital. The total loans and
extensions of credit outstanding at one time, both direct and indirect, by a
savings bank to any borrower may not exceed 15% of the savings bank's total
capital. At September 30, 1997, the Bank did not have any loans-to-one
borrower which exceeded this limitation. For information about the largest
borrowers of the Bank, see "Lending Activities" above.
Illinois-chartered savings banks generally have all lending, investment
and other powers which are possessed by federal savings banks based in
Illinois. Recent federal and state legislative developments have reduced
distinctions between commercial banks and savings institutions in Illinois
with respect to lending and investment authority. As federal law has expanded
the authority of federally chartered savings institutions to engage in
activities previously reserved for commercial banks, Illinois legislation and
21
<PAGE>
regulations ("parity legislation") have given Illinois-chartered savings
institutions such as the Bank the powers of federally chartered savings
institutions.
The board of directors of a savings bank may declare dividends on its
capital stock based upon the savings bank's annualized net profits except
that until the paid-in surplus of the savings bank equals its capital stock,
a dividend may not be declared unless there has been transferred to paid-in
surplus not less than 10% of the net profits of the preceding half year in
the case of quarterly or semiannual dividends, or not less than 10% of the
net profits for the preceding year in the case of annual dividends. Dividends
may not be declared if a savings bank fails to meet its capital requirements.
Further written approval of the Commissioner is required before any dividends
exceeding 50% of a savings bank's profits for any fiscal year may be
declared. A dividend may be declared out of retained earnings at any time.
An Illinois-chartered savings bank may not make a loan to a person owning
10% or more of its stock, an affiliated person, an agent or an attorney of
the savings bank, either individually or as an agent or partner of another,
except under the rules of the Commissioner and regulations of the FDIC. This
restriction does not apply, however, to loans made (i) on the security of
single-family residential property used by the borrower as his or her
residence, and (ii) to a non-profit, religious, charitable or fraternal
organization or a corporation in which the savings bank has been authorized
to invest by the Commissioner. Furthermore, a savings bank may not purchase,
lease or acquire a site for an office building or an interest in real estate
from an officer, director, employee or the holder of more than 10% of the
savings bank's stock or certain affiliated persons as set forth in Illinois
law, unless the prior written approval of the Commissioner is obtained.
The SBA provides that any depository institution may merge into a savings
bank operating under the SBA. The Board of Directors of each merging
institution must approve a plan of merger by resolution adopted by majority
vote of all members of the respective boards. After such approval, the plan
of merger must be submitted to the Commissioner for approval. The
Commissioner may make an examination of the affairs of each merging
institution (and their affiliates). The Commissioner shall not approve a
merger agreement unless he finds that, among other things, (i) the resulting
institution meets all requirements of the SBA; (ii) the merger agreement is
fair to all persons affected; and (iii) the resulting institution will be
operated in a safe and sound manner. If approved by the Commissioner, the
plan of merger must be submitted to stockholders of the depository
institution for approval, and may be required to be submitted to members if a
mutual savings bank is one of the constituent entities. A two-thirds
affirmative vote is required for approval of the plan of merger.
The SBA permits an Illinois savings bank holding company to control or
own more than 5% of the voting shares or rights of a savings bank only if the
principal place of business of the savings bank is located in those states in
which a savings bank holding company is permitted to acquire an Illinois
savings bank. When requested, the Commissioner will review the laws of the
state to determine whether the laws of that state expressly authorize an
Illinois savings bank holding company to acquire a savings bank in that state.
A savings bank holding company may invest in the stock of or other form
of equity ownership of any company which the board of directors determines to
be in the best interests of stock owners and depositors, and such investment
must be documented in the holding company's minutes with reference to such
items as price/earning ratios, future prospects, sources of income and
compatibility with the overall business plan of the holding company.
22
<PAGE>
THE FEDERAL DEPOSIT INSURANCE CORPORATION IMPROVEMENT ACT OF 1991
On December 19, 1991, the FDICIA became law. FDICIA primarily addressed
the recapitalization of the BIF, which insures the deposits of commercial
banks and savings associations. In addition, FDICIA established a number of
new mandatory supervisory measures for savings associations and banks.
STANDARDS FOR SAFETY AND SOUNDNESS. FDICIA requires the federal bank
regulatory agencies to prescribe regulatory standards for all insured
depository institutions and depository institution holding companies relating
to: (i) internal controls, information systems and audit systems; (ii) loan
documentation; (iii) credit underwriting; (iv) interest rate risk exposure;
(v) asset growth; and (vi) compensation, fees and benefits. The compensation
standards would prohibit employment contracts, compensation or benefit
arrangements, stock option plans, fee arrangements or other compensatory
arrangements that provide excessive compensation, fees or benefits or could
lead to material financial loss. In addition the federal banking regulatory
agencies are required to prescribe by regulation standards specifying: (i)
maximum classified assets to capital ratios; (ii) minimum earnings sufficient
to absorb losses without impairing capital; and (iii) to the extent feasible,
a minimum ratio of market value to book value for publicly traded shares of
depository institutions and depository institution holding companies. In
November 1993, the federal banking agencies, including the FDIC, proposed
regulations regarding the implementation of these standards.
PROMPT CORRECTIVE ACTION REGULATION. FDICIA establishes a system of
prompt corrective action to resolve the problems of undercapitalized
institutions. Under this system, which became effective on December 19, 1992,
the FDIC and the other banking regulators are required to establish five
capital categories ("well-capitalized," "adequately capitalized,"
"undercapitalized," "significantly undercapitalized" and "critically
undercapitalized") and to take certain mandatory supervisory actions (and are
authorized to take other discretionary actions) with respect to institutions
in the three undercapitalized categories, the severity of which will depend
upon the capital category in which the institution is placed. Generally,
FDICIA requires the appropriate banking regulator to appoint a receiver or
conservator for an institution that is critically undercapitalized.
Under the FDIC rule implementing the prompt corrective action provisions,
a bank that has a total risk-based capital ratio of 10.0% or greater, a Tier
1 risk-based capital ratio of 6.0% or greater and a leverage ratio of 5.0% or
greater, and is not subject to any written agreement, order, capital
directive or prompt corrective action directive to meet and maintain a
specific capital level for any capital measure is deemed to be
"well-capitalized." A bank that has a total risk-based capital ratio of 8.0%
or greater, a Tier 1 risk-based capital ratio of 4.0% or greater and a
leverage ratio of 4.0% or greater (or a greater ratio of 3.0% or greater if
the bank is rated composite "1" under the CAMEL rating system and is not
experiencing or anticipating significant growth) and does not meet the
definition of a "well-capitalized" bank is considered to be "adequately
capitalized." A bank that has a total risk-based capital of less than 8.0% or
has a Tier 1 risk-based capital ratio that is less than 4.0% (or a leverage
ratio that is less than 3.0% if the Bank is rated a composite "1" under the
CAMEL rating system) is considered "undercapitalized." A bank that has total
risk-based capital ratio of less than 6.0%, or a Tier 1 risk-based capital
ratio that is less than 3.0% or a leverage ratio that is less than 3.0% is
considered to be "significantly undercapitalized," and a bank that has a
ratio of tangible equity to total assets (core capital, such as common equity
capital, and cumulative perpetual preferred stock minus all intangible
assets, except for limited amounts of purchased mortgage servicing rights) to
assets equal to or less than 2% is deemed to be "critically
undercapitalized." Under the FDIC rule, the FDIC may reclassify a
well-capitalized bank as adequately capitalized, and may require an
23
<PAGE>
adequately capitalized bank or an undercapitalized bank to comply with
certain mandatory or discretionary supervisory actions as if the bank were in
the next lower capital category (except that the FDIC may not reclassify a
significantly undercapitalized bank as critically undercapitalized), if the
FDIC determines the Bank is in an unsafe or unsound condition or the Bank has
received and not corrected a less than satisfactory rating for any of the
categories of asset quality, management, earnings or liquidity.
An undercapitalized institution is required to submit an acceptable
capital restoration plan to its appropriate federal banking agency. The plan
must specify: (i) the steps the institution will take to become adequately
capitalized; (ii) the capital levels to be attained each year; (iii) how the
institution will comply with any regulatory sanctions then in effect against
the institution; and (iv) the types and levels of activities in which the
institution will engage.
Under FDICIA, an insured depository institution cannot make a capital
distribution (as broadly defined to include, among other things, dividends,
redemptions and other repurchases of stock) or pay management fees to any person
that controls the institution if thereafter it would be undercapitalized. The
appropriate federal banking agency, however, may (after consultation with the
FDIC) permit an insured depository institution to repurchase, redeem, retire or
otherwise acquire its shares if such action: (i) is taken in connection with the
issuance of additional shares or obligations in at least an equivalent amount;
and (ii) will reduce the institution's financial obligations or otherwise
improve its financial condition. An undercapitalized institution generally is
prohibited from increasing its average total assets. An undercapitalized
institution also generally is prohibited from making acquisitions, establishing
any branches or engaging in any new line of business except in accordance with
an accepted capital restoration plan or with the approval of the appropriate
federal banking agency. In addition, the appropriate federal banking agency is
given authority with respect to any undercapitalized depository institution to
take any of the actions it is required to or may take with respect to a
significantly undercapitalized institution as described below if it determines
that such actions are necessary to carry out the purpose of FDICIA.
FDICIA provides that the appropriate federal regulatory agency must
require an insured depository institution that is significantly
undercapitalized, or is undercapitalized and either fails to submit an
acceptable capital restoration plan within the time period allowed by
regulation or fails in any material respect to implement a capital
restoration plan accepted by the appropriate federal banking agency, to take
one or more of the following actions: (i) sell a sufficient amount of equity
securities to become adequately capitalized; (ii) enter into a business
combination with another institution (or holding company), but only if
grounds exist for appointing a conservator or receiver; (iii) restrict
certain transactions with banking affiliates as if the "sister bank"
exception to the requirements of Section 23A of the Federal Reserve Act
("FRA") did not exist; (iv) otherwise restrict transactions with bank or
nonbank affiliates; (v) restrict interest rates that the institution pays on
deposits to the rates offered in the institution's market area; (vi) restrict
asset growth or reduce total assets; (vii) alter, reduce or terminate
activities; (viii) hold a new election of directors; (ix) dismiss any
director or senior executive officer who held office for more than 180 days
immediately before the institution became undercapitalized, provided that in
requiring dismissal of a director or senior officer, the agency must comply
with certain procedural requirements, including the opportunity for an
appeal; (x) employ "qualified" senior executive officers; (xi) cease
accepting deposits from correspondent depository institutions; (xii) divest
certain non-depository affiliates which pose a danger to the institution;
(xiii) be divested by the institution's holding company; and (xiv) take any
other action that the agency determines would better carry out the purposes
of the prompt corrective action provisions.
24
<PAGE>
In addition to the foregoing sanctions, without the prior approval of the
appropriate federal banking agency, a significantly undercapitalized
institution may not pay any bonus to any senior executive officer or increase
the rate of compensation for such an officer without regulatory approval.
Furthermore, in the case of an undercapitalized institution that has failed
to submit or implement an acceptable capital restoration plan, the
appropriate federal banking agency cannot approve any such bonus.
No later than 90 days after an institution becomes critically
undercapitalized, the appropriate federal banking agency for the institution
must appoint a receiver (or, with the concurrence of the FDIC, a conservator)
unless the agency, as well as the FDIC concludes that another course of
action would be appropriate. Notwithstanding the foregoing, a receiver must
be appointed after 270 days unless the FDIC concludes that the institution:
(i) has positive net worth; (ii) is in compliance with a capital restoration
plan; (iii) is profitable or has a sustainable upward trend in earnings; and
(iv) is reducing its ratio of nonperforming loans to total loans and the head
of the appropriate federal banking agency and the FDIC certify that the
institution is viable and not expected to fail. The FDIC is required by
regulation or order to "restrict the activities" of such critically
undercapitalized institutions. The restrictions must include prohibitions on
the following activities without prior FDIC approval: (i) entering into any
material transactions not in the usual course of business; (ii) extending
credit for any highly leveraged transactions; (iii) engaging in any "covered
transaction" (as defined in Section 23A of the Federal Reserve Act) with an
affiliate; (iv) paying excessive compensation or bonuses; and (v) paying
interest on new or renewed liabilities that would increase the institution's
average cost of funds to a level significantly exceeding prevailing rates in
the market.
The following table sets forth the Bank's regulatory capital position at
September 30, 1997, as compared to the capital requirements to be well
capitalized under the prompt corrective action provisions.
<TABLE>
<CAPTION>
TO BE WELL CAPITALIZED
UNDER PROMPT
CORRECTIVE ACTION
ACTUAL PROVISIONS
(IN THOUSANDS) (IN THOUSANDS)
---------------------- ----------------------
<C> <C> <C> <C>
AMOUNT RATIO AMOUNT RATIO
--------- ----- --------- -----
Total capital (to risk weighted.......... $ 7,441 18.2% $ 4,090 10%
Tier I capital (to risk weighted......... 7,218 17.6 2,454 6
Tier I capital (to average............... 7,218 8.4 4,302 5
</TABLE>
CONSERVATORSHIP AND RECEIVERSHIP AMENDMENTS. FDICIA amended the grounds
for the appointment of a conservator or receiver for an insured depository
institution to include the following events: (i) consent by the board of
directors of the institution; (ii) cessation of the institution status as an
insured depository institution; (iii) the institution is undercapitalized and
has no reasonable prospect of becoming adequately capitalized when required
to do so, fails to submit an acceptable capital plan or materially fails to
implement an acceptable capital plan; or (iv) the institution is critically
undercapitalized or otherwise has substantially insufficient capital. FDICIA
provides that an institution's directors shall not
25
<PAGE>
be liable to its stockholders or creditors for consenting to the appointment
of the FDIC or RTC as receiver or conservator or to a supervisory acquisition
of the institution.
OTHER DEPOSIT INSURANCE REFORMS. FDICIA amended the Federal Deposit
Insurance Act to prohibit insured depository institutions that are not
well-capitalized from accepting brokered deposits unless a waiver has been
obtained from the FDIC. Deposit brokers are required to register with the
FDIC.
CONSUMER PROTECTION PROVISIONS. FDICIA enacted consumer oriented
provisions including a requirement of notice to regulators and customers for
any proposed branch closing and provisions intended to encourage the offering
of "lifeline" banking accounts and lending in distressed communities. FDICIA
also requires depository institutions to make additional disclosures to
depositors with respect to the rate of interest and the terms of their
deposit accounts.
UNIFORM LENDING STANDARD. Under FDICIA, the federal banking agencies are
required to adopt uniform regulations prescribing standards for extensions of
credit that are secured by liens on interests in real estate or made for the
purpose of financing the construction of a building or other improvements to
real estate. Savings associations must adopt and maintain written policies
that establish appropriate limits and standards for extensions of credit that
are secured by liens or interests in real estate or are made for the purpose
of financing permanent improvements to real estate. These policies must
establish loan portfolio diversification standards, prudent underwriting
standards (including LTV limits) that are clear and measurable, loan
administration procedures, and documentation, approval and reporting
requirements. The real estate lending policies must reflect consideration of
the Guidelines that have been adopted by the federal banking regulators.
The Guidelines, among other things, require depository institutions to
establish internal loan-to-value limits for real estate loans that are not in
excess of the following supervisory limits: (i) for loans secured by
undeveloped land, the supervisory LTV limit is 65% of the value of the
collateral; (ii) for land development loans, the supervisory limit is 75%;
(iii) for loans for the construction of commercial, multi-family or other
nonresidential property, the supervisory limit is 80%; (iv) for loans for the
construction of one- to four-family properties, the supervisory limit is 85%;
and (v) for loans secured by other improved property (e.g. farmland,
commercial property and other income-producing property including
non-owner-occupied, one-to four- family property) the supervisory limit is
85%.
The Guidelines indicate that on a case-by-case basis it may be
appropriate to originate or purchase loans with LTV ratios in excess of the
supervisory LTV limits, based on the support provided by other credit
factors. The aggregate amount of loans in excess of the supervisory LTV
limits, however, should not exceed 100% of total capital and the total of
such loans secured by commercial, agricultural, multi-family and other
non-one- to four- family residential properties should not exceed 30% of
total capital.
The supervisory loan-to-value limits do not apply to certain categories
of loans including loans insured or guaranteed by the United States
Government and its agencies or by financially capable state, local or
municipal governments or agencies, loans backed by the full faith and credit
of state governments, loans that are to be sold promptly after origination
without recourse to a financially responsible party, loans that are renewed,
refinanced or restructured in connection with a workout, loans to facilitate
sales of real estate acquired by the institution in the ordinary course of
collecting a debt previously contracted and loans where the real estate is
not the primary collateral.
26
<PAGE>
ACCOUNTING
Effective October 1, 1996, the Bank adopted Financial Accounting
Standards Board ("FASB") Statement 122, "Accounting for Mortgage Servicing
Rights." Statement 122 requires a mortgage banking enterprise to recognize as
separate assets rights to service mortgage loans for others, however those
servicing rights are acquired. A mortgage banking enterprise should allocate
the total cost of the mortgage loans to the mortgage servicing rights and the
loans (without the mortgage servicing rights) based on their relative fair
values if it is practicable to estimate those fair values. The adoption of
Statement 122 had no significant impact upon the consolidated financial
statements of the Bank.
In June 1996, the FASB released SFAS No. 125, ACCOUNTING FOR TRANSFERS
AND EXTINGUISHMENTS OF LIABILITIES. SFAS No. 125 provides accounting and
reporting standards for transfers and servicing of financial assets and
extinguishments of liabilities. SFAS No. 125 requires a consistent
application of a financial-components approach that focuses on control. Under
that approach, after a transfer of financial assets, an entity recognizes the
financial and servicing assets it controls and the liabilities it has
incurred, and derecognizes liabilities when extinguished. SFAS No. 125 also
supersedes SFAS No. 122 and requires that servicing assets and liabilities be
subsequently measured by amortization in proportion to and over the period of
estimated net servicing income or loss and requires assessment for asset
impairment or increases obligation based on their fair values. SFAS No. 125
applies to transfers and extinguishments occurring after December 31, 1996
and early or retroactive application was not permitted. The adoption of SFAS
No. 125 had no material impact on the financial position or results of
operations of the Bank.
In March 1997, the FASB issued SFAS No. 128, EARNINGS PER SHARE, which is
effective for financial statements issued for periods ending after December
15, 1997. SFAS No. 128 simplifies the calculation of earnings per share (EPS)
by replacing primary EPS with basic EPS. It also requires dual presentation
of basic EPS and diluted EPS for entities with complex capital structures.
Basic EPS includes no dilution and is computed by dividing income available
to common shareholders by the weighted-average common shares outstanding for
the period. Diluted EPS reflects the potential dilution of securities that
could share in earnings, such as stock options, warrants, or other common
stock equivalents. The Bank expects SFAS No. 128 to have little impact on its
earnings per share calculations in future years, other than changing
terminology from primary EPS to basic EPS. All prior EPS data will be
restated to conform with the new presentation.
In June 1997, the FASB issued SFAS No. 130, REPORTING COMPREHENSIVE
INCOME. This statement establishes standards for the reporting and display of
comprehensive income and its components in a full set of general-purpose
financial statements. Comprehensive income is defined as "the change in
equity of a business enterprise during a period from transactions and other
events and circumstances from nonowner sources. It includes all changes in
equity during a period except those resulting from investments by owners and
distributions to owners. Presently, there are certain changes in assets and
liabilities not reported in a statement that reports results of operations
for the period in which they are recognized but instead are included in
balances within a separate component of equity in a statement of financial
position. Statements that contain these changes include SFAS No. 87,
EMPLOYERS' ACCOUNTING FOR PENSIONS, and SFAS No. 115, ACCOUNTING FOR CERTAIN
DEBT AND EQUITY SECURITIES. SFAS No. 130 amends SFAS No. 87 and 115 to
require that changes in the balances of items that under those statements are
reported directly in a separate component of equity in a statement of
financial position be reported in a financial statement that is displayed as
prominently as other financial statements. Items required by accounting
standards to be reported as direct
27
<PAGE>
adjustments to paid-in-capital, retained earnings, or other non-income equity
accounts are not to be included as components of comprehensive income. SFAS
No. 130 shall be effective for fiscal years beginning after December 15, 1997
with earlier application permitted. All comparative financial statements
provided for earlier periods shall be reclassified to reflect application of
the provisions of this statement.
RECAPITALIZATION OF SAIF AND ITS IMPACT ON SAIF PREMIUMS
The Bank's deposits are currently insured by the Savings Association
Insurance Fund (the "SAIF"), which is administered by the FDIC. Under the
FDIC's "risk-based" system each institution is assigned a deposit insurance
premium assessment rate. Until 1995, the risk-based deposit insurance
premiums paid by institutions insured by the SAIF and the Bank Insurance Fund
(the "BIF") had been assessed based on identical rate schedules having the
above range of premium assessment rates. The SAIF and BIF are each required
by statute to attain, and thereafter to maintain, a reserve to deposits ratio
of 1.25%. The BIF attained its required reserve level in late May 1995,
because of the BIF's greater premium revenues while the SAIF has not
primarily due to the fact that a substantial portion of the SAIF premiums is
required to be used to repay certain bonds (the "FICO Bonds") issued for the
purpose of funding the resolution of failed thrift institutions.
The FDIC had adopted amendments to its regulations to reduce
substantially the deposit insurance premiums assessment rate for members of
the BIF to between 0.00% and 0.27%. With respect to SAIF member institutions,
the FDIC adopted a final rule to retain the existing assessment rate schedule
applicable to SAIF member institutions of 0.23% to 0.31%. As a result, there
was a significant disparity between the assessment rate for BIF and SAIF
members. As long as the deposit rate premium disparity continued,
SAIF-insured institutions such as the Bank were placed at a significant
competitive disadvantage due to their higher premium costs, and the financial
condition of the SAIF could worsen if its deposit base shrinks as a result of
the disparity.
On September 30, 1996, President Clinton signed the thrift fund rescue
and relief package as part of an omnibus spending measure. Under the plan,
premium disparity between thrifts and banks is reduced and a framework is in
place to merge charters and funds. Thrifts (including thrifts converted to
savings banks) were required to make a one-time special assessment of
approximately 66 basis points against an assessment base of March 31, 1995
deposits to capitalize SAIF. On an on-going basis, SAIF members such as the
Bank will pay $.0644 on every $100 in deposits, down from $.23, a 70 percent
reduction. The Bank's special assessment amounted to $440,046 and is included
in accrued expenses and other liabilities in the accompanying September 30,
1996 balance sheet.
HOLDING COMPANY REGULATION
GENERAL. The Company, as the sole shareholder of the Bank, is a bank
holding company. Bank holding companies are subject to comprehensive
regulation and regular examinations by the FRB under the Bank Holding Company
Act ("BHCA"), and the regulations of the FRB. The FRB also has extensive
enforcement authority over bank holding companies, including, among other
things, the ability to assess civil money penalties, to issue cease and
desist or removal orders and to require that a holding company divest
subsidiaries (including its bank subsidiaries). In general, enforcement
actions may be initiated for violations of law and regulations and unsafe or
unsound practices.
28
<PAGE>
Under FRB policy, a bank holding company must serve as a source of
strength for its subsidiary bank. Under this policy, the FRB may require, and
has required in the past, a holding company to contribute additional capital
to an undercapitalized subsidiary bank.
Under the BHCA, a bank holding company must obtain FRB approval before:
(i) acquiring, directly or indirectly, ownership or control of any voting
shares of another bank or bank holding company if, after such acquisition, it
would own or control more than 5% of such shares (unless it already owns or
controls the majority of such shares); (ii) acquiring all or substantially
all of the assets of another bank or bank holding company; or (iii) merging
or consolidating with another bank holding company.
The BHCA also prohibits a bank holding company, with certain exceptions,
from acquiring direct or indirect ownership or control of more than 5% of the
voting shares of any company which is not a bank or bank holding company, or
from engaging directly or indirectly in activities other than those of
banking, managing or controlling banks, or providing services for its
subsidiaries. The principal exceptions to these prohibitions involve certain
non-bank activities which, by statute or by FRB regulation or order, have
been identified as activities closely related to the business of banking or
managing or controlling banks. The list of activities permitted by the FRB
includes, among other things, operating a savings institution, mortgage
company, finance company, credit card company or factoring company;
performing certain data processing operations; providing certain investment
and financial advice; underwriting and acting as an insurance agent for
certain types of credit-related insurance; leasing property on a full-payout,
non-operating basis; selling money orders, travelers' checks and United
States Savings Bonds; real estate and personal property appraising; providing
tax planning and preparation services; and, subject to certain limitations,
providing securities brokerage services for customers.
DIVIDENDS. The FRB has issued a policy statement on the payment of cash
dividends by bank holding companies, which expresses the FRB's view that a
bank holding company should pay cash dividends only to the extent that the
holding company's net income for the past year is sufficient to cover both
the cash dividends and a rate of earnings retention that is consistent with
the holding company's capital needs, asset quality and overall financial
condition. The FRB also indicated that it would be inappropriate for a
company experiencing serious financial problems to borrow funds to pay
dividends. Furthermore, under the prompt corrective action regulations
adopted by the FRB, the FRB may prohibit a bank holding company from paying
any dividends if the holding company's bank subsidiary is classified as
"undercapitalized."
Bank holding companies are required to give the FRB prior written notice
of any purchase or redemption of its outstanding equity securities if the
gross consideration for the purchase or redemption, when combined with the
net consideration paid for all such purchases or redemptions during the
preceding 12 months, is equal to 10% or more of the consolidated net worth of
the bank holding company. The FRB may disapprove such a purchase or
redemption if it determines that the proposal would constitute an unsafe or
unsound practice or would violate any law, regulation, FRB order, or any
condition imposed by, or written agreement with, the FRB. This notification
requirement does not apply to any company that meets the well-capitalized
standard for commercial banks, has a safety and soundness examination rating
of at least a "2" and is not subject to any unresolved supervisory issues.
29
<PAGE>
FEDERAL SECURITIES LAW
The common stock of the Company is registered with the Securities and
Exchange Commission ("SEC") under the Exchange Act. The Company is also
subject to the information, proxy solicitation, insider trading restrictions
and other requirements of the SEC under the Exchange Act.
Company Common Stock held by persons who are affiliates (generally
officers, directors and principal stockholders) of the Company may not be
resold without registration, unless such Common Stock is sold in accordance
with certain resale restrictions. If the Company meets specified current
public information requirements, each affiliate of the Company is able to
sell in the public market, without registration, a limited number of shares
in any three-month period.
FEDERAL HOME LOAN BANK SYSTEM
The Bank is a member of the FHLB-Chicago, which is one of the 12 regional
Federal Home Loan Banks. As a member of the FHLB, the Bank is required to
purchase and maintain stock in the FHLB in an amount equal to the greater of
1% of its aggregate unpaid residential mortgage loans, home purchase
contracts or similar obligations at the beginning of each year, or 1/20 (or
such greater fraction as established by the FHLB) of outstanding FHLB
advances. At September 30, 1997, the Bank had $618,800 in FHLB stock, which
was in compliance with this requirement. In past years the Bank has received
dividends on its FHLB stock. Over the past two years such dividends have
averaged 6.78%, and were 6.81% for the fiscal year ended September 30, 1997.
All 12 Federal Home Loan Banks are required by law to provide financial
assistance for the resolution of troubled savings associations and to
contribute to affordable housing programs through direct loans or interest
subsidies on advances targeted for community investment and low- and
moderate-income housing projects. These contributions could cause rates on
the FHLB advances to increase and could affect adversely the level of FHLB
dividends paid and the value of FHLB stock in the future.
The FHLB serves as a reserve or central bank for its members within its
assigned region. It is funded primarily from proceeds derived from the sale
of consolidated obligations of the FHLB System. It makes loans to members
(I.E., advances) in accordance with policies and procedures established by
the board of directors of the FHLB. These policies and procedures are subject
to the regulation and oversight of the Federal Housing Finance Board (the
"FHFB").
FHLB advances are subject to certain collateral requirements. First, all
advances must be fully secured by sufficient collateral as determined by the
FHLB. Eligible collateral consists of first mortgage loans fewer than a
specified number of days delinquent. Other forms of collateral may be
accepted as collateralization or, under certain circumstances, to renew
outstanding advances. All long-term advances are required to be used to
provide funds for residential home financing. In addition, the FHLB has
established standards of community service that members must meet to maintain
access to long-term advances. In addition, pursuant to FHLB regulations, each
FHLB is required to establish programs for affordable housing that involve
interest subsidies from the FHLBs on advances to members engaged in lending
at subsidized interest rates for low- and moderate-income, owner-occupied
housing and affordable housing, and certain other community purposes.
30
<PAGE>
FEDERAL AND STATE TAXATION
FEDERAL TAXATION. For federal income tax purposes, the Company, the Bank
and the Bank's subsidiary will file a consolidated federal income tax return
on a fiscal year basis. The Company and the Bank are subject to the rules of
federal income taxation generally applicable to corporations under the
Internal Revenue Code of 1986, as amended (the "Code").
Most corporations are not permitted to make deductible additions to bad
debt reserves under the Code. However, savings and loan associations and
savings banks such as the Bank, which meet certain tests prescribed by the
Code are permitted to establish reserves for bad debts and to make annual
additions thereto which may, within specified formula limits, be taken as a
deduction in computing taxable income for federal income tax purposes. The
amount of the bad debt reserve deduction form "non-qualifying loans" is
computed under the experience method. For tax years beginning before December
31, 1995, the amount of the bad debt reserve deduction for "qualifying real
property loans" (generally, loans secured by improved real estate) may be
computed under either the experience method or the percentage of taxable
income method (based on an annual election). If a savings and loan
association or savings bank elected the latter method, it could claim, each
year, a deduction based on a percentage of taxable income, without regard to
actual bad debt experience. Under the experience method, the bad debt reserve
deduction is an amount determined under a formula based upon the bad debts
actually sustained by the institution over a period of years.
Under recently enacted legislation, the percentage of taxable income
method has been repealed for years beginning after December 31, 1995.
Pursuant to this legislation, the Bank will continue to be permitted to use
the experience method, but will be required to recapture (i.e., take into
income) over a six year period its applicable excess reserves, i.e., the
balance of its reserves for losses on qualifying loans and non-qualifying
loans, as of the close of the last tax year beginning before January 1, 1996,
over the greater of (a) the balance of such reserves as of December 31, 1987
(pre-1988 reserves) or (b) an amount that would have been the balance of such
reserves as of the close of the last tax year beginning before January 1,
1996 had the bank always computed the additions to its reserves using the
experience method. Postponement of the recapture is possible for a two-year
period if an institution meets a minimum level of mortgage lending for 1996
and 1997. As of September 30, 1997, the Bank's bad debt reserve subject to
recapture over a five-year period totaled approximately $130,000.
If an institution ceases to qualify as a "bank" (as defined in code
Section 581) or converts to a credit union, the pre-1988 reserves and the
supplemental reserve are restored to income ratably over a six-year period,
beginning in the tax year the institution no longer qualifies as a bank. The
balance of the pre-1988 reserves are also subject to recapture in the case of
certain excess distributions to (including distributions on liquidation and
disillusion), or redemptions of, shareholders.
Effective October 1, 1993, the Bank adopted Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes." Under the asset
and liability method of Statement 109, deferred tax assets and liabilities
are recognized for the future tax consequences attributable to differences
between the financial statement carrying amounts of existing assets and
liabilities and their respective tax bases. To the extent that current
available evidence about the future raises doubt about the realization of a
deferred tax asset, a valuation allowance must be established. Deferred tax
assets and liabilities are measured using enacted tax
31
<PAGE>
rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. Under
Statement 109, the effect on deferred tax assets and liabilities of a change
in tax rates is recognized in income in the period that includes the
enactment date.
The Bank is subject to the corporate alternative minimum tax which is
imposed to the extent it exceeds the Bank's regular income tax for the year.
The alternative minimum tax will be imposed at the rate of 20% of a specially
computed tax base. Included in this base will be a number of preference
items, including the following: (i) 100% of the excess of a savings
association's bad debt deduction over the amount that would have been
allowable on the basis of actual experience; (ii) interest on certain
tax-exempt bonds issued after August 7, 1986; and (iii) for years beginning
after 1989 an amount equal to 75% of the amount by which a savings
association's "adjusted current earnings" (as specially defined) exceeds its
taxable income with certain adjustments, including the addition of preference
items. In addition, for purposes of the new alternative minimum tax, the
amount of alternative minimum taxable income that may be offset by net
operating losses is limited to 90% of alternative minimum taxable income.
DISTRIBUTIONS. To the extent that the Bank makes "nondividend
distributions" to the Company, such distributions will be considered to
result in distributions from the balance of its bad debt reserve as of
December 31, 1987 (or a lesser amount if the Bank's loan portfolio decreased
since December 31, 1987) and then from the supplemental reserve for losses on
loans ("Excess Distributions"), and an amount based on the Excess
Distributions will be included in the Bank's taxable income. Nondividend
distributions include distributions in excess of the Bank's current and
accumulated earnings and profits, distributions in redemption of stock and
distributions in partial or complete liquidation. However, dividends paid out
of the Bank's current or accumulated earnings and profits, as calculated for
federal income tax purposes, will not be considered to result in a
distribution from the Bank's bad debt reserve. The amount of additional
taxable income created from an Excess Distribution is an amount that, when
reduced by the tax attributable to the income, is equal to the amount of the
distribution. Thus, if the Bank makes a "nondividend distribution," then
approximately one and one-half the times the Excess Distribution would be
includable in gross income for federal income tax purposes, assuming a 34%
corporate income tax rate (exclusive of state and local taxes). The Bank does
not presently intend to pay dividends that wold result in a recapture of any
portion of its tax bad debt reserve.
CORPORATE ALTERNATIVE MINIMUM TAX. The Code imposes a tax on alternative
minimum taxable income ("AMTI") at a rate of 20%. The excess of the tax bad
debt reserve deduction using the percentage of taxable income method over the
deduction that would have been allowable under the experience method is
treated as a preference item for purposes of computing the AMTI. In addition,
only 90% of AMTI can be offset by net operating loss carryovers. AMTI is
increased by an amount equal to 75% of the amount by which the Bank's
adjusted current earnings exceeds its AMTI (determined without regard to this
preference and prior to reduction for net operating losses). For taxable
years beginning after December 31, 1986, and before January 1, 1996, an
environmental tax of 0.12% of the excess of AMTI (with certain modification)
over $2.0 million is imposed on corporations, including the Bank, whether or
not an Alternative Minimum Tax is paid.
DIVIDENDS-RECEIVED DEDUCTION. The Company may exclude from its income
100% of dividends received from the Bank as a member of the same affiliated
group of corporations. The corporate dividends-received deduction is
generally 70% in the case of dividends received from unaffiliated
corporations with which the Company and the Bank will not file a consolidated
tax return, except that if the Company or the
32
<PAGE>
Bank owns more than 20% of the stock of a corporation distributing a
dividend, then 80% of any dividends received may be deducted.
ILLINOIS TAXATION. The Company and the Bank are subject to Illinois
taxation and file Illinois income tax returns. For Illinois income tax and
replacement tax purposes, the Bank was taxed at a rate equal to 7.13% of
income during 1996. For these purposes, "net income" generally means federal
taxable income, subject to certain adjustments (including the addition of
interest income on state and municipal obligations). The exclusion of income
on United States Treasury obligations has the effect of reducing the Illinois
taxable income of savings associations.
The Bank has been audited by the Internal Revenue Service through August
31, 1984. For additional information regarding taxation, see Note 11 of Notes
to Consolidated Financial Statements.
PERSONNEL
As of September 30, 1997, the Bank and its subsidiary had a total of 28
full-time and 19 part-time employees. None of the Bank's employees is
represented by a collective bargaining group. Management believes its
relationship with the Bank's employees is good.
ITEM 2. PROPERTIES
PROPERTIES
The Bank conducts business through its main office located in Pekin,
Illinois, and one branch office located in Manito, Illinois. The following
table sets forth certain information concerning the main office and the
Bank's branch office at September 30, 1997. The aggregate net book value of
the Bank's premises and equipment was $1,051,000 at September 30, 1997. The
Bank believes that its current facilities are adequate to meet the present
and immediately foreseeable needs of the Bank.
<TABLE>
<CAPTION>
LOCATION YEAR OPENED OWNED OR LEASED
--------------------------- --------------- ----------------
<C> <C> <S>
601-617 Court St.
Pekin, IL 61554 1969 Owned
108 South Adams Street
Manito, IL 61546 1979 Owned
</TABLE>
The Bank's accounting and record keeping activities are maintained on an
on-line base with an independent service bureau. The Bank owns data
processing equipment it uses for its internal processing needs. The net book
value of such data processing equipment at September 30, 1997, was $47,738.
ITEM 3. LEGAL PROCEEDINGS
There are various claims and lawsuits in which the Bank is periodically
involved, such as claims to enforce liens, condemnation proceedings on
properties in which the Bank holds security interests, claims
33
<PAGE>
involving the making and servicing of real property loans and other issues
incident to the Bank's business. In the opinion of management, no material
loss is expected from any of such pending claims or lawsuits.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders, through this
solicitation of proxies or otherwise, during the quarter ended September 30,
1997.
PART II
ITEM 5. MARKET FOR COMMON STOCK AND RELATED
SECURITY HOLDER MATTERS
The "Stockholder Information" section of the annual report to
stockholders for the fiscal year ended September 30, 1997 (the "Annual Report
to Stockholders") is incorporated herein by reference. No other sections of
the Annual Report to Stockholders are incorporated herein by this reference.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The "Management's Discussion and Analysis of Financial Condition and
Results of Operations" section of the Annual Report to Stockholders is
incorporated herein by reference. No other sections of the Annual Report to
Stockholders are incorporated herein by this reference.
ITEM 7. FINANCIAL STATEMENTS
Pages 14 through 41 of the Annual Report to Stockholders are incorporated
herein by reference. No other sections of the Annual Report to Stockholders
are incorporated herein by this reference.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
There has been no current report on Form 8-K filed within twenty four
months prior to the date of the most recent financial statements reporting a
change of accountants and/or reporting disagreements on any matter of
accounting principal or financial statement disclosure.
34
<PAGE>
PART III
ITEM 9. DIRECTORS AND PRINCIPAL OFFICERS OF THE BANK
(a) Information concerning the directors of the Company is incorporated
herein by reference hereunder in the Proxy Statement.
(b) Set forth below is information concerning the principal executive
officers of the Company.
<TABLE>
<CAPTION>
NAME AGE POSITIONS HELD WITH THE COMPANY
- -------------------- --- ----------------------------------
<S> <C> <C>
James A. Crafton 56 Vice President--Installment Loans
Lisa M. Harness 40 Vice President--Loan Servicing
David E. Riley 36 Vice President--Mortgage Loans
Eugene Van Vooren 65 Vice President and Treasurer
</TABLE>
ITEM 10. MANAGEMENT COMPENSATION
Information with respect to management compensation and transactions
required under this item is incorporated by reference hereunder in the Proxy
Statement.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT
Information concerning security ownership of certain beneficial owners
and management is incorporated herein by reference from the Proxy Statement.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information concerning certain relationships and related transactions is
incorporated herein by reference from the Proxy Statement.
ITEMS 13. EXHIBITS AND REPORTS ON FORM 8-K
(a)(1) Financial Statements
The following information appearing in the Registrant's Annual Report to
Stockholders for the year ended September 30, 1997, is incorporated by
reference in this Annual Report on Form 10-KSB as Exhibit 13.
35
<PAGE>
ANNUAL REPORT SECTION
- ---------------------
Independent Auditor's Report 14
Consolidated Balance Sheets 15
Consolidated Statements of Income 16
Consolidated Statements of Changes in
Stockholders' Equity 18
Consolidated Statements of Cash Flows 19
Notes to Consolidated Financial Statements 21
With the exception of the aforementioned information, the Registrant's
Annual Report to Stockholders for the year ended September 30, 1997 is not
deemed filed as part of this Annual Report on Form 10-KSB.
(a)(2) Financial Statement Schedules
All financial statement schedules have been omitted as the required
information is inapplicable or has been included in the Notes to Consolidated
Financial Statements.
(b) Reports on Form F-3:
Pekin Savings Bank did not file any Current Reports on Form F-3 with the
Federal Deposit Insurance Corporation during the last quarter of the fiscal
year ended September 30, 1997.
36
<PAGE>
(c) Exhibits
REFERENCE TO PRIOR
FILING OR EXHIBIT
REGULATION S-K NUMBER ATTACHED
EXHIBIT NUMBER DOCUMENT HERETO
- ----------------- ------------------------------- ---------------------------
2 Plan of Acquisition None
or Reorganization
3 Articles of Incorporation 3.1
3 Bylaws 3.2
4 Instruments defining the rights 3.1
of security holders, including
debentures
9 Voting Trust Agreement None
10 Material contracts None
11 Statement re: computation of Not
per share earnings Required
12 Statement re: Not
computation of ratios Required
13 Form of Annual Report 13
to Security Holders
18 Letter re: change None
in accounting principles
21 Subsidiaries of Registrant 21
22 Published Reports Regarding None
Matters Submitted to
Vote of Security Holders
37
<PAGE>
23 Consent of Experts and Counsel Not Applicable
24 Power of Attorney Not Required
27 Financial Data Schedule 27
99 Additional Exhibits None
- ------------------------
* Filed as exhibits to the Registrant's Application for Approval of
Conversion on Form AC, filed with the Office of Thrift Supervision on
June 30, 1992, as amended on August 7, 1992. All such previously filed
documents is are hereby incorporated by reference in accordance with Item
601 of Regulation S-K.
38
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
PROGRESSIVE BANCORP, INC. Date:
January 9, 1998 By: /s/ Arthur E. Krile, Jr.
- ---------------------- -------------------------------
Arthur E. Krile, Jr.
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
By: /S/ Arthur E. Krile, Jr By: /s/ Eugene Van Vooren
--------------------------- ---------------------------
Arthur E. Krile, Jr. Eugene Van Vooren
President, Chief Executive Vice President and Treasurer
Officer and Director (Principal Financial Officer)
(Principal Executive Officer)
Date: January 9, 1998 Date: January 9, 1998
By: /s/ Orville G. Deppert By: /s/ R.H. More
--------------------------- ---------------------------
Orville G. Deppert R.H. More
Chairman of the Board and Vice Chairman of the Board and
Director Director
Date: January 9, 1998 Date: January 9, 1998
By: /S/ John L. Steger By: /s/ James S. Wolf
--------------------------- ---------------------------
John L. Steger James S. Wolf
Director Director
Date: January 9, 1998 Date: January 9, 1998
By: /s/ Patrick E. Oberle By: /s/ E. Glen Rittenhouse
--------------------------- ---------------------------
Patrick E. Oberle E. Glen Rittenhouse
Director Senior Vice President,
Secretary and Director
Date: January 9, 1998 Date: January 9, 1998
<PAGE>
EXHIBIT 13
ANNUAL REPORT TO STOCKHOLDERS
<PAGE>
PROGRESSIVE BANCORP, INC.
1997
ANNUAL REPORT
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Message of President and Chief Executive Officer........................................................... 1
Selected Consolidated Financial and Other Data............................................................. 2
Management's Discussion and Analysis of
Financial Condition and Results of Operations........................................................... 5
Directors and Officers of Pekin Savings and the Company.................................................... 13
Independent Auditor's Report............................................................................... 14
Consolidated Balance Sheets................................................................................ 15
Consolidated Statements of Income.......................................................................... 16
Consolidated Statements of Changes in Stockholders' Equity................................................. 18
Consolidated Statements of Cash Flows...................................................................... 19
Notes to Consolidated Financial Statements................................................................. 21
Common Stock and Related Matters........................................................................... 42
Stockholder Information.................................................................................... 42
</TABLE>
<PAGE>
December 19, 1997
Dear Stockholders:
On behalf of the Board of Directors, management and staff of our newly formed
bank holding company, Progressive Bancorp, Inc., and its new wholly-owned
subsidiary, Pekin Savings Bank, I am pleased to present our 1997 Annual
Report.
This past year, Pekin Savings realized a 2.5% asset growth of $2.1 million.
Savings deposits also increased 2.5% or $1.7 million over the previous year.
The fiscal year's profit before taxes was $1.1 million compared to $.5
million last year. However, last year's profit reflected a $.4 million
expense due to the one-time SAIF deposit premium assessment on September 30,
1996, the last day of our fiscal year.
Our profit added $3.92 per share to our stockholders' equity. The book value
per share at the close of fiscal 1997 increased to $43.52.
The market price of our stock as of September 30, 1997 was $42.00 per share
compared to $28.50 per share a year ago.
Our Tier 1 Capital level as of September 30, 1997 was 8.4% of average
assets. Our Risk-Based Capital on that date was 18.2% of risk-weighted
assets. All capital levels exceed the regulatory minimums.
Pekin Travel Company, a division of our subsidiary Pekin Financial Services,
reported sales for the past fiscal year of $2.8 million, a 30.3% increase
over the previous fiscal year. Pekin Travel continues to increase its sales
and profit.
Our mortgage loan originations were down 28.8% from the previous year. This
is a direct reflection of the higher mortgage interest rates prevailing this
fiscal year compared to fiscal 1996. There were 286 mortgage loans closed
totalling $15.7 million in fiscal 1997. Our consumer loan department was very
busy this past fiscal year, originating 719 loans in the amount of $7.8
million. A net gain of $2.2 million was realized at fiscal year-end in
consumer loans.
A special stockholders' meeting was held on October 10, 1997. At that meeting
our stockholders voted to approve the bank holding company form of ownership,
whereby Pekin Savings became a wholly-owned subsidiary of our newly formed
bank holding company, Progressive Bancorp, Inc. This type of ownership
structure will provide greater flexibility and diversification opportunities
as we strategize our plans for growth. I want to thank all our stockholders
who responded by sending in their executed proxies. We needed a two-thirds
favorable voting response. Thanks to you, we received a 77.1% favorable vote
out of 84.1% of the total eligible votes cast. In addition, our stockholders
voted to approve a change in the Bank's name to "Pekin Savings Bank."
The Board of Directors authorized a cash dividend of $1.00 per share, which
was paid in June 1997. This was an increase of $.75 per share over each of
the previous two years. It's gratifying to be paying dividends to our
stockholders...especially when we can pay them three years sooner than
initially thought possible and at an increasing rate during the course of our
short five year history as a stock institution.
Banking in America Today is Truly an Evolving Business. Awaiting us is a
"Technology Frontier" that holds many opportunities for delivering more and
better services, with greater efficiency, to our customers...essential
elements to continuing success and reward to you, our stockholders. The Board
of Directors, along with management, look forward to these challenges in the
coming year.
Happy New Year to you and yours!
Arthur E. Krile, Jr.
President and Chief Executive Officer
<PAGE>
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA OF THE BANK
Set forth below are selected financial and other data of Pekin Savings
Bank ("Pekin Savings" or the "Bank"). This financial data is derived in part
from, and should be read in conjunction with, the Consolidated Financial
Statements of the Bank and notes thereto presented elsewhere in this Annual
Report.
<TABLE>
<CAPTION>
AT SEPTEMBER 30,
-----------------------------------------------------
1997 1996 1995 1994 1993
--------- --------- --------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Total amount of:
Assets................................................... $ 85,412 $ 83,299 $ 82,359 $ 78,802 $ 76,051
Loans receivable, net.................................... 57,937 55,777 48,419 43,683 32,749
Mortgage-backed securities............................... 8,123 10,639 14,589 16,601 22,105
Total investments:
Interest-bearing deposits.............................. 4,043 1,419 2,755 3,364 1,471
Investment securities.................................. 11,884 11,238 12,696 11,276 4,182
Assets held for sale (1)................................. -- -- -- -- 12,644
Deposits................................................... 69,059 67,323 66,913 66,537 68,327
Borrowed funds........................................... 8,000 8,000 8,000 6,000 2,000
Retained earnings, substantially
restricted............................................. 5,899 5,372 5,021 4,357 3,472
Stockholders' equity..................................... 7,320 6,657 6,408 5,466 4,789
</TABLE>
- ------------------------
(1) Consists of certain U.S. Treasury securities, mortgage-backed securities
and fixed-rate first mortgage loans that may not be held to their
contractual maturity.
2
<PAGE>
SELECTED FINANCIAL RATIOS AND OTHER DATA
<TABLE>
<CAPTION>
AT OR FOR THE YEAR ENDED SEPTEMBER 30,
-----------------------------------------------------
1997 1996 1995 1994 1993
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Return on average assets (net income
divided by average total assets)............................... 0.82% 0.46% 0.88% 1.15% 1.21%
Return on average equity (net income
divided by average equity)..................................... 9.87 5.88 11.95 17.05 21.77
Average equity to average assets................................. 8.28 7.90 7.34 6.72 5.54
Average equity to average liabilities............................ 9.06 8.58 7.92 7.21 5.86
Retained earnings to total assets
at end of period............................................... 6.91 6.45 6.10 5.53 4.56
Total stockholders' equity to total
assets at end of period........................................ 8.57 7.99 7.78 6.94 6.30
Interest rate spread during period............................... 2.51 2.33 2.86 3.30 2.84
Net interest margin during period (1)............................ 2.80 2.62 3.11 3.47 3.04
Interest expense to average
interest-earning assets........................................ 4.77 4.79 4.48 4.12 4.91
Interest income to average assets................................ 7.17 7.05 7.29 7.29 7.66
Interest expense to average assets............................... 4.52 4.56 4.30 3.96 4.73
Non-interest expense to average assets........................... 2.28 2.82 2.32 2.45 2.18
Nonperforming loans to total loans at
end of period.................................................. 0.80 0.20 0.25 0.11 0.43
Nonperforming assets to total assets............................. 0.54 0.28 0.17 0.09 0.32
Allowance for loan losses to net loans
receivable at end of period.................................... 0.38 0.39 0.44 0.46 0.64
Average interest-earning assets to
average interest-bearing liabilities........................... 106.29 106.12 105.48 104.44 104.08
Net interest income to other
operating expenses............................................. 116.47 88.33 128.58 136.22 134.68
Number of:
Real estate loans outstanding.................................. 1,385 1,482 1,483 1,454 1,514
Deposit accounts............................................... 9,308 9,387 9,367 9,504 9,853
Offices........................................................ 2 2 2 2 2
</TABLE>
- ------------------------
(1) Net interest margin represents net interest income divided by average
interest-earning assets.
3
<PAGE>
SUMMARY OF OPERATING DATA
<TABLE>
<CAPTION>
AT OR FOR THE YEAR ENDED SEPTEMBER 30,
-----------------------------------------------------
1997 1996 1995 1994 1993
--------- --------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
Interest income (1).............................................. $ 6,105 $ 5,963 $ 5,861 $ 5,638 $ 6,001
Interest expense................................................. 3,846 3,855 3,460 3,059 3,703
--------- --------- --------- --------- ---------
Net interest income.............................................. 2,259 2,108 2,401 2,579 2,298
Provision for loan losses........................................ 12 12 20 41 36
--------- --------- --------- --------- ---------
Net interest income after
provision for loan losses.................................. 2,247 2,096 2,381 2,538 2,262
--------- --------- --------- --------- ---------
Noninterest income:
Service charges................................................ 141 111 112 136 124
Travel agency fees, net of
direct expenses.............................................. 256 200 153 113 --
Commissions from sale of annuities............................. 8 51 10 9 15
Net gain on sale of investments,
mortgage-backed securities, assets
held for sale, and loans held
for sale..................................................... 73 122 72 112 514
Other.......................................................... 308 287 242 248 205
--------- --------- --------- --------- ---------
Total noninterest income..................................... 786 771 589 618 858
--------- --------- --------- --------- ---------
Noninterest expense:
General and administrative expense............................. 1,916 1,928 1,865 1,815 1,628
Net (gain) loss on sale of real estate owned................... 5 (6) 1 8 42
Real estate owned expense, net of
income....................................................... 19 24 (6) 38 34
BIF/SAIF special assessment.................................... -- 440 -- -- --
Other.......................................................... -- -- 7 32 2
--------- --------- --------- --------- ---------
Total noninterest expense.................................... 1,940 2,386 1,867 1,893 1,706
--------- --------- --------- --------- ---------
Income before income taxes and
cumulative effect of change in
accounting principle........................................... 1,093 481 1,103 1,263 1,414
Income taxes..................................................... 398 88 398 447 469
--------- --------- --------- --------- ---------
Income before cumulative effect of
change in accounting principle................................. 695 393 705 816 945
Cumulative effect of change in
accounting for income taxes.................................... -- -- -- 70 --
--------- --------- --------- --------- ---------
Net income.................................................... $ 695 $ 393 $ 705 $ 886 $ 945
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Per common share data:
Primary income per share before
cumulative effect of change in
accounting principle......................................... $ 3.92 $ 2.24 $ 4.05 $ 4.74 $ 5.75
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Primary income per share......................................... $ 3.92 $ 2.24 $ 4.05 $ 5.14 $ 5.75
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
- ------------------------
(1) Includes fee income on the servicing of loans originated and sold by the
Bank.
4
<PAGE>
PROGRESSIVE BANCORP, INC.
PEKIN SAVINGS BANK
Progressive Bancorp, Inc. (the "Company") is a Delaware corporation which
is the holding company for Pekin Savings. The Company was organized by the
Bank in the fourth quarter of 1997 for the purpose of acquiring all of the
capital stock of the Bank in connection with the reorganization of the Bank
into the bank holding company structure. The only significant asset of the
Company is the capital stock of the Bank, and the business of the Company
currently consists solely of the business of the Bank. Since the Company was
formed in the last calendar quarter of 1997 (subsequent to the end of the
1997 fiscal year), all financial information presented in this Annual Report
is the financial data for the Bank and its subsidiary on a consolidated basis.
Pekin Savings Bank is an Illinois-chartered stock savings bank
headquartered in Pekin, Illinois. The Bank was founded in 1882 and has been a
member of the Federal Home Loan Bank System since 1955. Its deposits are
insured up to the regulatory maximum by the Savings Association Insurance
Fund, which is administered by the Federal Deposit Insurance Corporation. On
January 17, 1994, the Bank converted from an Illinois-chartered savings and
loan association to an Illinois-chartered savings bank.
The Bank is, and intends to continue to be, a community-oriented
financial institution committed to offering a variety of financial services
to meet the needs of its local community. The Bank is engaged primarily in
the business of attracting deposits from the general public and using such
funds to originate mortgage loans for the purchase of single-family homes in
Tazewell and Mason counties, Illinois. The Bank also invests in
mortgage-backed securities, all of which are secured by one- to four-family
residential mortgage loans that are insured or guaranteed by the Federal Home
Loan Mortgage Corporation, Federal National Mortgage Association or
Government National Mortgage Association. The Bank also makes home equity
loans secured by the borrower's principal residence and other types of
consumer loans such as auto loans and home improvement loans. To a lesser
extent, the Bank makes interim construction loans. Although the Bank has a
small number of commercial real estate loans in its portfolio, such loans are
not actively originated by the Bank. In addition to its lending activities
and investments in mortgage-backed securities, the Bank invests in securities
issued by the United States Government and its agencies.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
The Bank's net income is primarily dependent on its net interest income,
which is the difference between interest income earned on its loan,
mortgage-backed securities and investment portfolios, and its cost of funds
consisting of interest paid on deposits and borrowings. Net interest income
also is affected by the relative amounts of interest-earning assets and
interest-bearing liabilities. The Bank's net income also is affected by its
provision for loan losses, as well as the amount of non-interest income,
including loan origination fees and service charges and gains on the sale of
securities and loans held for sale, and non-interest expense, such as
salaries and employee benefits, deposit insurance premiums, occupancy and
equipment costs and income taxes. Earnings of the Bank also are affected
significantly by general economic and competitive conditions in its market
area, particularly changes in market interest rates, government policies and
actions of regulatory authorities.
The Bank's current business strategy is to continue to operate as a
well-capitalized, profitable and independent community financial institution
dedicated to home ownership and to providing quality service to its
customers. The Bank intends to implement this strategy by: (1) providing
quality customer service by closely monitoring the needs of its customers;
(2) emphasizing the origination of residential mortgage loans and consumer
loans and by offering other personal services; (3) reducing interest rate
risk exposure by matching asset and liability maturities and rates; (4)
controlling operating costs; (5) maintaining asset quality; and (6)
maintaining capital in excess of regulatory requirements while controlling
growth.
5
<PAGE>
AVERAGE BALANCES, INTEREST AND AVERAGE YIELD/COST
The following table sets forth certain information relating to the Bank's
average balance sheet and reflects the average yield on assets and average
cost of liabilities for the periods indicated and the average yields earned
and rates paid. Such yields and costs are derived by dividing income or
expense by the average balance of assets or liabilities, respectively, for
the periods presented. Average balances are derived from month-end balances.
Management does not believe that the use of month-end balances instead of
daily average balances has caused any material difference in the information
presented.
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
---------------------------------------------------------------------
1997 1996
----------------------------------- --------------------------------
AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE INTEREST YIELD/COST BALANCE INTEREST YIELD/COST
--------- --------- ------------- --------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loan portfolio (1)...................................... $ 55,265 $ 4,545 8.22% $ 51,379 $ 4,162 8.10%
Investment securities................................... 12,139 719 5.92 12,984 733 5.65
Mortgage-backed securities.............................. 9,380 622 6.63 13,273 894 6.74
Interest-bearing deposits............................... 3,766 219 5.82 2,844 174 6.12
--------- --------- --------- ---------
Total interest-earning assets......................... $ 80,550 $ 6,105 7.58 $ 80,480 $ 5,963 7.41
--------- --------- --------- ---------
--------- --------- --------- ---------
Interest-bearing liabilities:
Deposits................................................ $ 67,553 $ 3,345 4.95% $ 67,837 $ 3,369 4.97%
Borrowed funds.......................................... 8,231 501 6.09 8,000 486 6.08
--------- --------- --------- ---------
Total interest-bearing liabilities.................... $ 75,784 $ 3,846 5.07 $ 75,837 $ 3,855 5.08
--------- --------- --------- ---------
--------- ---------
Net interest income....................................... $ 2,259 $ 2,108
--------- ---------
--------- ---------
Interest rate spread (2).................................. 2.51% 2.33%
---- ----
---- ----
Net yield on interest-earning assets (3).................. 2.80% 2.62%
---- ----
---- ----
Ratio of average interest-earning
assets to average interest-bearing
liabilities............................................. 106.29% 106.12%
------ ------
------ ------
</TABLE>
- ------------------------
(1) Average balances include non-accrual loans.
(2) Interest rate spread represents the difference between the average yield on
interest-earning assets and the average cost of interest-bearing
liabilities.
(3) Net yield on interest-earning assets represents net interest income as a
percentage of average interest-earning assets.
6
<PAGE>
YIELDS EARNED AND RATES PAID
The following table sets forth for the periods indicated, the weighted
average yields earned on the Bank's assets, the weighted average interest
rates paid on the Bank's liabilities, together with the net yield on average
interest-earning assets.
<TABLE>
<CAPTION>
AT YEAR ENDED SEPTEMBER 30,
SEPTEMBER 30, -----------------------
1997 1997 1996
----------------- --------- ---------
<S> <C> <C> <C>
Weighted average yield
on loan portfolio................................ 7.93% 8.22% 8.10%
Weighted average yield on
mortgage-backed securities....................... 6.53 6.63 6.74
Weighted average yield on investment
portfolio........................................ 6.33 5.92 5.65
Weighted average yield on interest-
bearing deposits................................. 5.99 5.82 6.12
Weighted average yield on all interest-earning
assets........................................... 7.47 7.58 7.41
Weighted average rate paid on deposit
accounts......................................... 5.95 4.95 4.97
Weighted average rate paid on borrowed
funds............................................ 5.68 6.09 6.08
Weighted average rate paid on all
interest-bearing liabilities..................... 5.92 5.07 5.08
Interest rate spread (spread between
weighted average rate earned on
all interest-earning assets and
weighted average rate paid
on all interest-bearing liabilities)............. 1.55 2.51 2.33
Net yield (net interest income as
a percentage of average interest-
earning assets).................................. 1.89 2.80 2.62
</TABLE>
7
<PAGE>
RATE/VOLUME ANALYSIS
The following table describes the extent to which changes in interest
rates and changes in the volume of interest-earning assets and
interest-bearing liabilities have affected the Bank's interest income and
interest expense during the periods indicated. For each category of
interest-earning asset and interest-bearing liability, information is
provided on changes attributable to: (i) changes in volume (changes in volume
multiplied by prior rate); (ii) changes in rates (changes in average rate
multiplied by prior average volume); (iii) changes in rate-volume (changes in
rate multiplied by the change in volume); and (iv) the net change.
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
---------------------------------------------------------------------------------
1997 VS. 1996 1996 VS. 1995
------------------------------------- ------------------------------------------
INCREASE/ (DECREASE) INCREASE/(DECREASE)
DUE TO DUE TO
----------------------------- TOTAL --------------------------- TOTAL
RATE/ INCREASE RATE/ INCREASE
VOLUME RATE VOLUME (DECREASE) VOLUME RATE VOLUME (DECREASE)
--------- ------- -------- ----------- -------- -------- ---------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest income:
Loan portfolio........................ $ 315 $ 62 $ 7 $ 384 $ 475 $ (137) $ (17) $ 321
Mortgage-backed securities............ (262) (15) 5 (272) (171) (58) 9 (220)
Interest-bearing deposits............. 55 (9) (2) 44 (19) (7) -- (26)
Investment securities................. (48) 35 (1) (14) 17 10 (1) 26
----- ---- --- ------ ----- ------ ---- -----
Total interest-earning assets....... $ 60 $ 73 $ 9 $ 142 $ 302 $ (192) $ (9) $ 101
----- ---- --- ------ ----- ------ ---- -----
----- ---- --- ------ ----- ------ ---- -----
Interest expense:
Deposits.............................. $ (14) $ (14) $ 4 $ (24) $ 57 $ 240 $ -- $ 297
Borrowed funds........................ 14 1 -- 15 81 13 3 97
----- ---- --- ------ ----- ------ ---- -----
Total interest-bearing
liabilities....................... $ -- $ (13) $ 4 $ (9) $ 138 $ 253 $ 3 $ 394
----- ---- --- ------ ----- ------ ---- -----
----- ---- --- ------ ----- ------ ---- -----
Net change in interest income........... $ 60 $ 86 $ 5 $ 151 $ 164 $ (445) $ (12) $ (293)
----- ---- --- ------ ----- ------ ---- -----
----- ---- --- ------ ----- ------ ---- -----
</TABLE>
8
<PAGE>
RESULTS OF OPERATIONS
GENERAL. The earnings of the Bank depend primarily on its level of net
interest income, which is the difference between interest earned on the
Bank's interest-earning assets and the interest paid on interest-bearing
liabilities. Net interest income is a function of the Bank's interest rate
spread, which is the difference between the average yield earned on
interest-earning assets and the average rate paid on interest-bearing
liabilities, as well as a function of the average balance of interest-earning
assets as compared to interest-bearing liabilities.
INTEREST INCOME. Interest income, which includes fee income on the
servicing of loans, increased by $142,000, or 2.4%, to $6.1 million for the
fiscal year ended September 30, 1997 ("fiscal 1997") from $6.0 million for
the fiscal year ended September 30, 1996 ("fiscal 1996"). The increase in
interest income resulted from an increase in the average yield on
interest-earning assets to 7.58% for fiscal 1997 from 7.41% for fiscal 1996.
Interest income from the Bank's loan portfolio increased by $384,000, or
9.2%, due to a $3.9 million, or 7.6%, increase in the average balance of such
assets. The average yield on such assets increased from 8.10% for fiscal 1996
to 8.22% for fiscal 1997.
INTEREST EXPENSE. Interest expense decreased by $9,000, or 0.2%, to $3.8
million for fiscal 1997 from $3.9 million for fiscal 1996. The decrease in
interest expense for fiscal 1997 was due to a slight decrease in the average
rate paid on interest-bearing liabilities to 5.07% in fiscal 1997 from 5.08%
in fiscal 1996, as well as a decrease of $53,000, or 0.1%, in the average
balance of interest-bearing liabilities in fiscal 1997 as compared to fiscal
1996. The decrease in the average rate paid on interest-bearing liabilities
reflected the Bank's management efforts to preserve its interest rate spread
while still maintaining competitive interest rates offered on savings
deposits without paying premiums to retain savings. The Bank sought
alternative funding sources such as advances from the Federal Home Loan Bank
System. The overall decrease in interest expense was offset by an increase in
the Bank's average balance of FHLB advances to $8.2 million in fiscal 1997
from $8.0 million in fiscal 1996, as well as a slight increase in the average
rate paid on such advances to 6.09% in fiscal 1997 from 6.08% in fiscal 1996.
NET INTEREST INCOME. Net interest income is a function of the Bank's
interest rate spread, which is the difference between the average yield
earned on interest-earning assets and the average rate paid on
interest-bearing liabilities, as well as a function of the average balance of
interest-earning assets as compared to interest-bearing liabilities. Net
interest income, before provision for loan losses, was $2.3 million in fiscal
1997, an increase of $151,000, or 7.2%, from fiscal 1996. The increase in net
interest income was primarily due to an increase in the Bank's interest rate
spread to 2.51% in fiscal 1997 from 2.33% in fiscal 1996. The increase in
interest rate spread resulted primarily from an increase in the yield on
interest-earning assets. The slight decrease in the cost of the Bank's
interest-bearing liabilities also helped increase the Bank's interest rate
spread.
PROVISION FOR LOSSES ON LOANS. The Bank maintains an allowance for loan
losses based upon management's periodic evaluation of known and inherent
risks in the Bank's loan portfolio, its past loan loss experience, adverse
situations that may affect borrowers' ability to repay loans, the estimated
value of underlying loan collateral, and current and expected future economic
conditions. The Bank's provision for loan losses was $12,000 in fiscal 1997
and $12,000 in fiscal 1996. Total allowance for loan losses was $223,000, or
0.38% of net loans receivable, at September 30, 1997, compared to $218,000,
or 0.39% of net loans receivable, at September 30, 1996. The provision for
loan losses reflected management's current view of the risks in the Bank's
loan portfolio based on an evaluation of specific loans in its portfolio,
estimated collateral values, historical loss experience, current economic
trends, and the existing level of the Bank's allowance for loan losses.
NON-INTEREST INCOME. The Bank's principal sources of non-interest income
include service charges on transaction accounts, net gains on the sale of
mortgage-backed securities, investment securities and loans held for sale, and
miscellaneous fees and charges for services offered by the Bank, including
credit cards. During the past several years, gains recorded on the sale of
mortgage-backed securities, other investments and loans held for sale have had a
significant impact on non-interest income and the Bank's net income. However,
there can be no assurance that the Bank will continue to have gains on the sale
of investments, mortgage-backed securities or loans held for sale, at the levels
reflected in recent years. Non-interest income increased by $15,000, or 1.9%, to
$786,000 in fiscal 1997, as
9
<PAGE>
compared to $771,000 in fiscal 1996. The increase reflected a $30,000, or
27.0%, increase in service charges. Also contributing to the increase were
travel agency fees, net of direct expense, provided by the Bank's subsidiary,
Pekin Finanical Services, which increased $56,000, or 28.2%, due to increased
sales volume. However, commissions from sales of annuities through the Bank's
service corporation decreased $44,000, or 84.9%. This reflected reduced
demand for annuity products. Other non-interest income increased $33,000, or
20.2%. The increase was offset by a $49,000, or 40.0%, decrease in net gain
on the sale of investments, mortgage-backed securities, and loans held for
sale. In addition, loan origination fees decreased $12,000, or 9.7%, in
fiscal 1997 as compared to fiscal 1996, reflecting a decrease in loan
originations in fiscal 1997.
NON-INTEREST EXPENSE. Non-interest expense decreased by $447,000, or
18.7%, to $1.9 million for fiscal 1997 as compared to $2.4 million for fiscal
1996. The decrease was primarily due to a one-time BIF/ SAIF special
assessment of $440,000 related to the thrift fund rescue and relief package
that was paid in fiscal 1996, and the decrease in regular federal insurance
premiums of $124,000, or 79.6%, for fiscal 1997 from fiscal 1996. Offsetting
these decreases were increases in the Bank's compensation and benefits of
$22,000, or 2.1%, a $45,000, or 19.7% increase in premises and equipment
expenses, and a $33,000, or 9.8%, increase in other operating expenses.
INCOME BEFORE INCOME TAXES. Income before income taxes increased by
$613,000, or 127.4%, in fiscal 1997 as compared to fiscal 1996, reflecting an
increase in net interest income in fiscal 1997 as compared to fiscal 1996, as
well as the decrease in total non-interest expense in fiscal 1997 resulting
from the elimination of the one-time BIF/SAIF special assessment.
NET INCOME. Net income increased by $302,000, or 76.7%, to $695,000 in
fiscal 1997 from $393,000 in fiscal 1996. The increase in net income was
primarily the result of higher net interest income in fiscal 1997 as compared
to fiscal 1996, and lower total non-interest expense in fiscal 1997 as
compared to fiscal 1996, primarily due to the elimination of the one-time
BIF/SAIF special assessment.
LIQUIDITY AND CAPITAL RESOURCES
The Bank is required to maintain minimum levels of liquid assets as
defined by regulations of the Illinois Commissioner of Savings and
Residential Fiancne (the "Commissioner") and the Federal Deposit Insurance
Corporation (the "FDIC"). This requirement, which varies from time to time,
depending upon economic conditions and deposit flows, is based upon a
percentage of deposits and hsort-term borrowings. The required ratio
currently is 5%. The Bank historically has maintained a level of liquid
assets in excess of regulatory requirements, and the Bank's liquidity ratio
averaged 18.1% during the month of September 1997. The Bank adjusts its
liquidity levels in order to meet funding needs for deposit outflows, payment
o real estate taxes on mortgage loans escrowed for, repayment of borrowings,
when applicable, and loan commitments. The Bank also adjusts liquidity as
appropriate to meet its asset/liability objectives.
The Bank's primary sources of funds are deposits, amortization and
prepayment of loans and mortgage-backed securities, maturities of investment
securities and other short-term investments, proceeds from the sale of loans
held for sale, investment securities and mortgage-backed securities and funds
provided from operations. The Bank utilizes FHLB of Chicago advances as a
source of funds. While scheduled loan and mortgage-backed securities
repayments are a relatively predictable source of funds, deposit flows and
loan prepayments are greatly influenced by general interest rates, economic
conditions and competition. The Bank manages the pricing of its deposits to
maintain a steady deposit balance. In addition, the Bank invests excess funds
in short-term interest-earning assets which provide liquidity to meet lending
requirements. Short-term assets outstanding at September 30, 1997 and 1996
amounted to $7.4 million, and $3.3 million, respectively.
Commissioner and FDIC regulations require that the Bank maintain minimum
amounts of regulatory capital. The Bank's capital ratios exceeded the minimum
regulatory capital ratios as of the date hereof.
The Bank's liquidity, represented by cash and cash equivalents, is a
product of its operating, investing and financing activities. The primary
source of cash was net income and cash derived from financing activities.
10
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
-----------------------
1997 1996
----------- ----------
(IN THOUSANDS)
<S> <C> <C>
Cash and cash equivalents
at beginning of year.......................................................................... $ 2,691 $ 4,069
--------- ---------
Operating activities:
Net income..................................................................................... 695 393
Adjustments to reconcile net
income to net cash provided by
operating activities.......................................................................... 14 180
Other operating activities..................................................................... 68 85
--------- ---------
Net cash provided by
operating activities.......................................................................... 777 658
Net cash (used in) investing activities........................................................ (39) (2,404)
Net cash provided by
financing activities.......................................................................... 1,540 368
--------- ---------
Net increase (decrease) in cash
and cash equivalents.......................................................................... 2,278 (1,378)
--------- ---------
Cash and cash equivalents at end of year....................................................... $ 4,969 $ 2,691
--------- ---------
--------- ---------
</TABLE>
Liquidity management is both a daily and long-term function of business
management. Excess liquidity is generally invested in short-term investments,
such as interest-bearing deposits with the FHLB of Chicago. If the Bank
requires funds beyond its ability to generate them internally, borrowing
agreements exist with the FHLB of Chicago which provide an additional source
of funds. At September 30, 1997, the Bank had $8.0 million of outstanding
advances from the FHLB of Chicago.
At September 30, 1997, the Bank had outstanding mortgage loan commitments
of $746,000. Certificates of deposit scheduled to mature in one year or less
at September 30, 1997 totalled $32.9 million. Management believes that a
significant portion of such deposits will remain with the Bank.
IMPACT OF INFLATION AND CHANGING PRICES
The consolidated financial statements and related data presented herein
have been prepared in accordance with generally accepted accounting
principles which require the measurement of financial position and operating
results in terms of historical dollars, without considering changes in the
relative purchasing power of money over time due to inflation. The impact of
inflation is reflected in the increased cost of the Bank's operations. Unlike
most industrial companies, virtually all of the assets and liabilities of the
Bank are monetary. As a result, interest rates have a greater impact on the
Bank's performance than do the effects of general levels of inflation. In the
current interest rate environment, liquidity and the maturity structure of
the Bank's assets and liabilities are critical to the maintenance of
acceptable performance levels.
ASSET AND LIABILITY MANAGEMENT
The matching of assets and liabilities may be analyzed by examining the
extent to which such assets and liabilities are "interest rate sensitive" and
by monitoring an institution's interest rate sensitivity "gap." An asset or
liability is said to be interest rate sensitive within a specific time period
if it will mature or reprice within that time period. The interest rate
sensitivity gap is defined as the difference between the amount of
interest-earning assets maturing or repricing within a specific time period
and the amount of interest-bearing liabilities maturing or repricing within
that time period. A gap is considered positive when the amount of interest
rate sensitive assets exceeds the amount of interest rate sensitive
liabilities. A gap is considered negative when the amount of interest rate
sensitive liabilities exceeds the amount of interest rate sensitive assets.
During a period of rising interest rates, a negative gap
11
<PAGE>
would tend to adversely affect net interest income while a positive gap would
tend to result in an increase in net interest income. During a period of
falling interest rates, a negative gap would tend to result in an increase in
net interest income while a positive gap would tend to adversely affect net
interest income.
At September 30, 1997, total interest-bearing liabilities maturing or
repricing within one year exceeded total interest-earning assets maturing or
repricing in the same period by $41.1 million, representing a cumulative
negative one-year gap ratio of 49.9%. Accordingly, based on the gap model
below, in a rising interest rate environment, the Bank's net interest income
would be adversely affected. The Bank has an Asset-Liability Management
Committee which is responsible for reviewing the Bank's asset and liability
policies. The Committee meets and reports quarterly to the Board of Directors
on interest rate risks and trends, as well as liquidity and capital ratios
and requirements.
The following table sets forth the amounts of interest-earning assets and
interest-bearing liabilities outstanding at September 30, 1997 which are
anticipated by the Bank, based upon certain assumptions, to reprice or mature
in each of the future time periods shown.
<TABLE>
<CAPTION>
AT SEPTEMBER 30, 1997
----------------------------------------------------------------------------------
OVER
ONE YEAR 1 TO 2 2 TO 3 3 TO 5 5 TO 10 10
OR LESS YEARS YEARS YEARS YEARS YEARS TOTAL
----------- -------------- --------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Real estate mortgages (1)............... $ 1,319 $ 143 $ 821 $ 4,731 $ 9,521 $ 31,731 $ 48,266
Mortgage-backed securities (2).......... 742 2,186 1,198 1,332 719 1,925 8,102
Other loans............................. 998 601 920 1,633 4,683 1,352 10,187
Interest-bearing deposits............... 4,043 -- -- -- -- -- 4,043
Investment securities (2)............... 2,359 999 1,497 1,999 4,373 599 11,826
----------- -------------- --------- --------- --------- --------- ---------
Total interest-earning assets......... 9,461 3,929 4,436 9,695 19,296 35,607 82,424
Interest-bearing liabilities:
Demand accounts......................... 15,696 -- -- -- -- -- 15,696
Certificate of deposits of $100,000 or
more.................................. 1,778 922 767 170 -- -- 3,637
Other certificates of deposit........... 31,131 10,579 4,192 3,824 -- -- 49,726
Borrowings.............................. 2,000 2,000 1,000 1,000 2,000 -- 8,000
----------- -------------- --------- --------- --------- --------- ---------
Total interest-bearing liabilities.... 50,605 13,501 5,959 4,994 2,000 -- 77,059
Interest sensitivity gap.................. (41,144) (9,572) (1,523) 4,701 17,296 35,607
Cumulative gap............................ (41,144) (50,716) (52,239) (47,538) (30,242) 5,365
Ratio of gap during the period to total
interest-earning assets................. (49.9)% (11.6)% (1.8)% 5.7% 21.0% 43.2%
Ratio of cumulative gap to total
interest-earning assets................. (49.9)% (61.5)% (63.4)% (57.7)% (36.7)% 6.5%
</TABLE>
- ------------------------
(1) Includes real estate sold on contract where the borrower does not have
title to the property; rather, title remains with the institution.
(2) For available-for-sale securities, amortized cost (not estimated market
value) is reported.
12
<PAGE>
- -----------------------------------------------------------------------------
DIRECTORS AND OFFICERS OF PEKIN SAVINGS AND THE COMPANY
- -----------------------------------------------------------------------------
ORVILLE G. DEPPERT became Chairman of the Board of the Bank in 1967 and
of the Company upon its formation. He is currently retired and was formerly
the owner/operator of George Deppert & Sons Farm Implements.
R. H. MORE became Vice Chairman of the Board of the Bank in 1981 and of
the Company upon its formation. He is currently retired, and was the former
publisher of THE PEKIN DAILY TIMES.
ARTHUR E. KRILE, JR. has been a director and President and Chief
Executive Officer of the Bank since 1985 and is also a director and President
and Chief Executive Officer of the Company.
E. GLEN RITTENHOUSE became a director of the Bank in 1987 and of the
Company upon its formation. He is the Senior Vice President and Secretary of
the Bank and of the Company, and has been employed by the Bank since 1973.
JOHN L. STEGER became a director of the Bank in 1996 and of the Company
upon its formation. He is a partner and vice president of Steger's, Ltd., a
furniture retailer located in Pekin, Illinois.
PATRICK E. OBERLE became a director of the Bank in 1994 and of the
Company upon its formation. He has been a principal of the law firm of
Elliff, Keyser, Oberle & Dancey, P.C., since 1976.
JAMES S. WOLF became a director of the Bank in 1994 and of the Company
upon its formation. He is a certified public accountant and has been
President of Wolf, Tesar & Company, P.C., an accounting firm, since 1980.
JAMES A. CRAFTON has been employed by the Bank since 1977 and is
presently Vice President-Installment Loans of the Bank.
LISA M. HARNESS has been employed by the Bank since 1976, and presently
serves as Vice President-Mortgage Loans-Servicing of the Bank.
DAVID EARL RILEY has been employed by the Bank since 1986, and presently
serves as Vice President-- Mortgage Loan Originations of the Bank.
EUGENE VAN VOOREN has been employed by the Bank since 1985 and presently
serves as Vice President and Treasurer of the Bank and of the Company. He is
the chief financial officer of the Bank and of the Company.
13
<PAGE>
INDEPENDENT AUDITOR'S REPORT
Board of Directors
Pekin Savings Bank
Pekin, Illinois
We have audited the accompanying consolidated balance sheets of Pekin
Savings Bank and subsidiary (Bank) as of September 30, 1997 and 1996, and the
related consolidated statements of income, changes in stockholders' equity,
and cash flows for the years then ended. These consolidated financial
statements are the responsibility of the Bank's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Pekin
Savings Bank and subsidiary as of September 30, 1997 and 1996, and the
results of their operations and their cash flows for the years then ended, in
conformity with generally accepted accounting principles.
Peoria, Illinois
November 3, 1997
14
<PAGE>
PEKIN SAVINGS BANK AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
ASSETS
SEPTEMBER 30,
----------------------------
1997 1996
------------- -------------
Cash and amounts due from banks............ $ 925,795 $ 1,271,013
Interest-bearing deposits.................. 4,042,707 1,419,243
Money market investments and investment
securities (note 2):
Held-to-maturity, at amortized cost
(estimated market value of $6,101,695
and $6,942,636, respectively).......... 6,095,717 7,057,503
Available-for-sale, at market value...... 5,788,174 4,180,952
Mortgage-backed securities (note 3):
Held-to-maturity, at amortized cost
(estimated market value of $5,219,101
and $6,367,601, respectively).......... 5,185,045 6,438,539
Available-for-sale, at market value...... 2,937,508 4,200,908
Loans receivable, net (note 5)............. 57,937,437 55,777,190
Accrued interest receivable (note 6)....... 502,868 485,355
Real estate owned, net of allowance for
losses of $0 and $7,500, respectively
(note 7)......................... -- 127,805
Premises and equipment (note 8)............ 1,050,625 1,079,485
Other assets............................... 946,365 1,261,097
------------- -------------
$85,412,241 $83,299,090
------------- -------------
------------- -------------
LIABILITIES AND STOCKHOLDERS EQUITY
Deposits (note 9).......................... $69,058,706 $67,322,686
Borrowed funds (note 10)................... 8,000,000 8,000,000
Advances from borrowers for taxes and
insurance................................ 188,439 231,499
Accrued expenses and other liabilities..... 845,356 1,088,114
------------- -------------
Total liabilities............ 78,092,501 76,642,299
------------- -------------
------------- -------------
Stockholders equity:
Serial preferred stock with no par
value, 5,000,000 shares authorized,
no shares issued and outstanding....... -- --
Common stock, $1 par value, 10,000,000
shares authorized, 168,172 and 167,439
shares issued and outstanding
September 30, 1997 and 1996,
respectively (note 16)................. 168,172 167,439
Paid-in surplus............................ 1,201,115 1,187,005
Retained earnings, substantially restricted
(notes 12 and 15)........................ 5,898,816 5,371,998
Net unrealized gain (loss) on
available-for-sale securities, net of
taxes (notes 2 and 3).................... 51,637 (69,651)
------------- -------------
Total stockholders equity.... 7,319,740 6,656,791
------------- -------------
$85,412,241 $83,299,090
------------- -------------
------------- -------------
The consolidated financial statements should be read only in connection
with the accompanying notes to consolidated financial statements.
15
<PAGE>
PEKIN SAVINGS BANK AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED SEPTEMBER 30,
--------------------------
1997 1996
------------ ------------
INTEREST INCOME
Loans receivable:
First mortgage loans........................... $ 3,512,370 $ 3,243,678
Other loans.................................... 1,033,084 917,593
Mortgage-backed securities:
Held-to-maturity............................... 400,769 462,166
Available-for-sale............................. 221,111 432,109
Interest-bearing deposits........................ 218,899 174,324
Money market investments and investment
securities:
Held-to-maturity.............................. 415,268 415,346
Available-for-sale............................ 303,737 317,739
------------ ------------
Total interest income........................ 6,105,238 5,962,955
------------ ------------
INTEREST ON DEPOSITS (note 9)...................... 3,344,911 3,368,827
INTEREST ON BORROWED FUNDS......................... 501,063 485,763
------------ ------------
Total interest expense....................... 3,845,974 3,854,590
------------ ------------
Net interest income.......................... 2,259,264 2,108,365
PROVISION FOR LOAN LOSSES (note 5)................. 12,000 12,000
------------ ------------
Net interest income after provision
for loan losses............................ 2,247,264 2,096,365
------------ ------------
NONINTEREST INCOME
Service charges.................................. 140,997 110,988
Travel agency fees, net of direct expenses....... 256,414 200,061
Commissions from sale of annuities............... 7,800 51,606
Net gain (loss) on sale of:
Investment securities (note 2)................. -- (19,850)
Mortgage-backed securities (note 3)............ 4,381 56,930
Loans held for sale (Note 4)................... 68,619 84,679
Loan origination fees............................ 111,975 123,979
Other............................................ 195,870 162,937
------------ ------------
Total noninterest income..................... 786,056 771,330
------------ ------------
16
<PAGE>
PEKIN SAVINGS BANK AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME (CONTINUED)
YEARS ENDED SEPTEMBER 30,
--------------------------
1997 1996
------------ ------------
NONINTEREST EXPENSE
Compensation and benefits........................ $ 1,079,389 $ 1,057,258
Premises and equipment........................... 271,935 227,140
Advertising and promotion........................ 48,200 46,003
Data processing.................................. 114,890 105,647
Federal insurance premiums....................... 31,789 155,781
Other operating expenses......................... 369,181 336,307
Net loss (gain) on sale of real estate owned..... 4,945 (5,783)
Real estate owned expense, net of income......... 19,455 24,371
BIF/SAIF special assessment (Note 17)............ -- 440,046
------------ ------------
Total noninterest expense.................... 1,939,784 2,386,770
------------ ------------
Income before income taxes................... 1,093,536 480,925
INCOME TAXES (note 11)............................. 398,546 87,712
------------ ------------
NET INCOME......................................... $ 694,990 $ 393,213
------------ ------------
------------ ------------
PER COMMON SHARE DATA
Primary income per share......................... $ 3.92 $ 2.24
------------ ------------
------------ ------------
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES AND EQUIVALENTS OUTSTANDING............... 177,411 175,290
------------ ------------
------------ ------------
These consolidated financial statements should be read only in connection with
the accompanying notes to consolidated financial statements.
17
<PAGE>
PEKIN SAVINGS BANK AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF
CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
NET
UNREALIZED
GAIN (LOSS)
ON AVAILABLE-
FOR-SALE
SERIAL SECURITIES TOTAL
PREFERRED COMMON PAID-IN RETAINED (NOTES 2 AND STOCKHOLDERS'
STOCK STOCK SURPLUS EARNINGS 3) EQUITY
------------- ---------- ------------ ------------ -------------- ------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE AT SEPTEMBER 30, 1995............ $ -- $ 166,798 $ 1,181,236 $ 5,020,645 $ 38,909 $ 6,407,588
Net income............................. -- -- -- 393,213 -- 393,213
Exercised stock options................ -- 641 5,769 -- -- 6,410
Dividends paid to shareholders......... -- -- -- (41,860) -- (41,860)
Decrease in net unrealized gain on
available-for-sale securities, net
of tax effect of $(55,911)........... -- -- -- -- (108,560) (108,560)
------------- ---------- ------------ ------------ -------------- ------------
BALANCE AT SEPTEMBER 30, 1996............ -- 167,439 1,187,005 5,371,998 (69,651) 6,656,791
Net income............................. -- -- -- 694,990 -- 694,990
Exercised stock options................ -- 733 14,110 -- -- 14,843
Dividends paid to shareholders......... -- -- -- (168,172) -- (168,172)
Increase in net unrealized gain on
available-for-sale securities, net
of tax effect of $62,465............. -- -- -- -- 121,288 121,288
------------- ---------- ------------ ------------ -------------- ------------
BALANCE AT SEPTEMBER 30,1997............. $ -- $ 168,172 $ 1,201,115 $ 5,898,816 $ 51,637 $ 7,319,740
------------- ---------- ------------ ------------ -------------- ------------
------------- ---------- ------------ ------------ -------------- ------------
</TABLE>
These consolidated financial statements should be read only in connection with
the accompanying notes to consolidated financial statements.
18
<PAGE>
PEKIN SAVINGS BANK AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
------------------------
<S> <C> <C>
1997 1996
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income......................................................................... $ 694,990 $ 393,213
----------- -----------
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation..................................................................... 110,404 90,894
Deferred income taxes............................................................ 203,593 (154,745)
Net (decrease) increase in deferred income....................................... (25,526) 5,903
Loss (gain) on sale of real estate owned......................................... 4,945 (5,783)
Provision for losses on real estate owned........................................ -- 7,500
Provision for loan losses........................................................ 12,000 12,000
Net (gain) loss on sale of:
Investment securities.......................................................... -- 19,850
Mortgage-backed securities..................................................... (4,381) (56,930)
Loans held for sale............................................................ (68,619) (84,679)
(Increase) decrease in accrued interest receivable............................... (17,513) 102,191
Premium amortization, net of discount accretion on mortgage-backed and
investment securities.......................................................... (6,963) (15,210)
(Decrease) increase in accrued expenses and other liabilities.................... (242,758) 287,289
Decrease (increase) in other assets.............................................. 48,674 (28,623)
----------- -----------
Total adjustments............................................................ 13,856 179,657
----------- -----------
Origination of loans held for sale................................................. (5,775,432) (6,619,558)
Proceeds from sales of loans held for sale......................................... 5,844,051 6,704,237
----------- -----------
Net cash provided by operating activities.................................... 777,465 657,549
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Principal received on mortgage-backed securities:
held-to-maturity................................................................. 1,254,216 1,926,793
available-for-sale............................................................... 493,523 781,523
Proceeds from the sale of mortgage-backed securities
available-for-sale............................................................... 885,061 2,059,125
Proceeds from the maturity of investment securities:
Held-to-maturity................................................................. 983,092 1,016,908
Available-for-sale............................................................... 1,000,000 --
Proceeds from the sale of investment securities:
held-to-maturity................................................................. -- 495,000
available-for-sale............................................................... -- 3,004,390
Purchase of mortgage-backed securities:
available-for-sale............................................................... -- (921,554)
Purchase of investment securities:
held-to-maturity................................................................. (17,700) (1,540,300)
available-for-sale............................................................... (2,531,622) (1,526,890)
Net increase in loans receivable................................................... (2,171,379) (7,560,440)
Purchases of premises and equipment................................................ (81,544) (215,474)
Proceeds from sale of real estate owned............................................ 183,900 80,500
Capital expenditures on real estate owned.......................................... (36,397) (3,990)
----------- -----------
</TABLE>
19
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
Net cash used in investing activities........................................ (38,850) (2,404,409)
----------- -----------
----------- -----------
</TABLE>
20
<PAGE>
PEKIN SAVINGS BANK AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
-------------------------
<S> <C> <C>
1997 1996
------------ -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits............................................................ $ 1,736,020 $ 409,594
Net decrease in advances from borrowers............................................. (43,060) (5,672)
Proceeds from FHLB advances......................................................... 2,000,000 --
Repayment of FHLB advances.......................................................... (2,000,000) --
Common stock options exercised...................................................... 14,843 6,410
Dividends paid...................................................................... (168,172) (41,860)
------------ -----------
Net cash provided by financing activities....................................... 1,539,631 368,472
------------ -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS.................................. 2,278,246 (1,378,388)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR........................................ 2,690,256 4,068,644
------------ -----------
CASH AND CASH EQUIVALENTS AT END OF YEAR.............................................. $ 4,968,502 $ 2,690,256
------------ -----------
------------ -----------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest on deposits and borrowed funds........................................... $ 3,847,956 $ 3,854,900
------------ -----------
------------ -----------
Income taxes, net of refunds...................................................... $ 170,273 $ 393,510
------------ -----------
------------ -----------
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING ACTIVITIES:
Transfers from loans to real estate acquired through foreclosure.................... $ 24,643 $ 184,852
------------ -----------
------------ -----------
</TABLE>
These consolidated financial statements should be read only in connection with
the accompanying notes to consolidated financial statements.
21
<PAGE>
PEKIN SAVINGS BANK AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Pekin Savings Bank (Bank) is an Illinois chartered savings bank located
in central Illinois. On September 29, 1992, the Bank converted from a mutual
to a stock form of ownership and completed its initial public offering. On
January 27, 1994, the former Pekin Savings and Loan Association converted
from an Illinois chartered stock savings and loan association to an Illinois
chartered savings bank, Pekin Savings Bank. The Bank is engaged primarily in
the business of attracting deposits from the general public and using such
funds to originate mortgage loans for the purchase of single-family homes in
Tazewell and Mason Counties, Illinois.
The accounting and reporting policies of the Bank and its subsidiary
conform to generally accepted accounting principles and to general practices
within the banking industry.
The following is a description of the more significant policies which the
Bank follows in preparing and presenting its consolidated financial
statements.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Pekin
Savings Bank and Pekin Financial Service Corporation, a wholly-owned
subsidiary of the Bank. All material intercompany transactions and balances
have been eliminated in consolidation.
USE OF ESTIMATES IN PREPARING FINANCIAL STATEMENTS
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of income and expenses during the
reporting period. Actual results could differ from those estimates.
CASH EQUIVALENTS
For purposes of the consolidated statements of cash flows, the Bank
considers interest-bearing deposits and all highly liquid debt instruments
purchased with a maturity of three months or less to be cash equivalents.
MONEY MARKET INVESTMENTS, INVESTMENT SECURITIES, AND MORTGAGE-BACKED SECURITIES
Money market investments include short-term liquidity funds.
Mortgage-backed securities represent participating interests in pools of
long-term first mortgage loans originated and serviced by the issuers of the
securities. Premiums and discounts on mortgage-backed securities are
amortized using the level-yield method over the remaining period to
contractual maturity, adjusted for anticipated prepayments.
22
<PAGE>
PEKIN SAVINGS BANK AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
MONEY MARKET INVESTMENTS, INVESTMENT SECURITIES, AND MORTGAGE-BACKED
SECURITIES (CONTINUED)
The Bank classifies its debt and equity securities into one of three
categories:
HELD-TO-MATURITY--includes investments in debt securities which the
Bank has the positive intent and ability to hold until maturity.
TRADING SECURITIES--includes investments in debt and equity securities
purchased and held principally for the purpose of selling them in the
near-term.
AVAILABLE-FOR-SALE--includes investments in debt and equity securities
not classified as held-to-maturity or trading (i.e., investments which the
Bank has no present plans to sell in the near-term but may be sold in the
future under different circumstances).
Debt securities classified as held-to-maturity are carried at amortized
cost in which the amortization of premiums and accretion of discounts are
recorded using the level-yield method. Unrealized holding gains and losses
for trading securities (for which no securities were so designated at
September 30, 1997 and 1996) are to be included in income, while such gains
and losses for available-for-sale securities are to be excluded from income
and reported as a net amount as a separate component of stockholders' equity
until realized. Unrealized holding gains and losses for held-to-maturity
securities are to be excluded from income and stockholders' equity. For
available-for-sale securities, gains or losses are realized and included in
noninterest income upon sale, based on the amortized cost of the individual
security sold. All previous market value adjustments included in the separate
component of stockholders' equity are reversed upon sale.
LOANS HELD FOR SALE
Mortgage loans originated and intended for sale in the secondary market
are carried at the lower of cost or estimated market value in the aggregate.
Net unrealized losses are recognized through a valuation allowance by charges
to income.
LOANS RECEIVABLE
First mortgage loans and other loans that management has the intent and
ability to hold for the foreseeable future or until maturity or payoff, are
stated at unpaid principal balances, less unearned discounts and net deferred
loan origination fees.
Loan fees and certain direct loan origination costs are deferred, and the
net fee or cost is recognized in income using the level-yield method over the
contractual life of the loans. Calculation of level-yield is done on a
loan-by-loan basis.
23
<PAGE>
PEKIN SAVINGS BANK AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
LOANS RECEIVABLE (CONTINUED)
The Bank grants primarily residential loans to customers in the immediate
Pekin area. Thus, a substantial portion of its debtors' ability to honor
their contracts is dependent upon the local agribusiness and manufacturing
economic sectors.
Discounts on other loans are recognized over the lives of the loans using
the level-yield method.
Accrual of interest on impaired loans, normally greater than 90 days past
due, is excluded from income by an offsetting increase in a specific
allowance for loss, when, in the opinion of management, such suspension is
warranted.
Provisions for losses on first mortgage loans and real estate sold on
contract are charged to operations when the loss becomes probable and
estimable, based upon the Bank's past loan loss experience, known and
inherent risk in the portfolio, estimated values of the underlying
collateral, and current and prospective economic conditions.
In addition, various regulatory agencies, as an integral part of their
examination process, periodically review the Bank's allowance for loan
losses. Such agencies may require the Bank to recognize additions to the
allowance for loan losses based on their judgment of information available to
them at the time of their examination.
REAL ESTATE OWNED
Real estate properties acquired through or in lieu of loan foreclosure
are to be sold and are initially recorded at the lower of cost or fair value
less estimated selling costs at the date of foreclosure (based upon appraisal
or the Bank's estimate). Subsequent valuation adjustments are made if the
fair value less estimated costs to sell the property falls below the carrying
amount. Costs of developing and improving such properties are capitalized.
Expenses related to holding such real estate, net of rental and other income,
are charged against operations as incurred.
PREMISES AND EQUIPMENT
Depreciation of premises and equipment is recorded using the
straight-line and accelerated methods over the estimated useful lives of the
related assets.
24
<PAGE>
PEKIN SAVINGS BANK AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INCOME TAXES
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax
rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. The effect on
deferred tax assets and liabilities of a change in tax rates is recognized in
income in the period that includes the enactment date. Deferred tax assets
are reduced by a valuation allowance if it is deemed more likely than not
that some or all of the deferred tax assets will not be realized.
PRIMARY INCOME PER SHARE
Primary income per share is computed based upon the weighted average
number of shares outstanding during the period plus the shares that would be
outstanding assuming exercise of the dilutive stock options which are
considered to be common stock equivalents. The number of shares that would be
issued from the exercise of stock options has been reduced by the number of
shares that could have been purchased from the proceeds at the average market
price of the Bank's stock.
ACCOUNTING CHANGES
In May 1995, the Financial Accounting Standards Board (FASB) issued SFAS
No. 122, ACCOUNTING FOR MORTGAGE SERVICING RIGHTS. SFAS No. 122 requires a
mortgage banking enterprise to recognize as separate assets rights to service
mortgage loans for others, however those servicing rights are acquired. A
mortgage banking enterprise should allocate the total cost of the mortgage
loans to the mortgage servicing rights and the loans (without the mortgage
servicing rights) based on their relative fair values if it is practicable to
estimate those fair values. The adoption of SFAS No. 122 had no significant
impact upon the Bank.
In June 1996, the FASB released SFAS No. 125, ACCOUNTING FOR TRANSFERS
AND EXTINGUISHMENTS OF LIABILITIES. SFAS No. 125 provides accounting and
reporting standards for transfers and servicing of financial assets and
extinguishments of liabilities. SFAS No. 125 requires a consistent
application of a financial-components approach that focuses on control. Under
that approach, after a transfer of financial assets, an entity recognizes the
financial and servicing assets it controls and the liabilities it has
incurred, and derecognizes liabilities when extinguished. SFAS No. 125 also
supersedes SFAS No. 122 and requires that servicing assets and liabilities be
subsequently measured by amortization in proportion to and over the period of
estimated net servicing income or loss and requires assessment for asset
impairment or increases obligation based on their fair values. SFAS No. 125
applies to transfers and extinguishments occurring after December 31, 1996
and early or retroactive application was not permitted. The adoption of SFAS
No. 125 had no material impact on the financial position or results of
operations of the Bank.
25
<PAGE>
PEKIN SAVINGS BANK AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
NEW ACCOUNTING STANDARDS
In March 1997, the FASB issued SFAS No. 128, EARNINGS PER SHARE, which is
effective for financial statements issued for periods ending after December
15, 1997. SFAS No. 128 simplifies the calculation of earnings per share (EPS)
by replacing primary EPS with basic EPS. It also requires dual presentation
of basic EPS and diluted EPS for entities with complex capital structures.
Basic EPS includes no dilution and is computed by dividing income available
to common shareholders by the weighted-average common shares outstanding for
the period. Diluted EPS reflects the potential dilution of securities that
could share in earnings, such as stock options, warrants, or other common
stock equivalents. The Bank expects SFAS No. 128 to have little impact on its
earnings per share calculations in future years, other than changing
terminology from primary EPS to basic EPS. All prior period EPS data will be
restated to conform with the new presentation.
In June 1997, the FASB issued SFAS 130, REPORTING COMPREHENSIVE INCOME.
This statement establishes standards for the reporting and display of
comprehensive income and its components in a full set of general-purpose
financial statements. Comprehensive income is defined as "the change in
equity of a business enterprise during a period from transactions and other
events and circumstances from nonowner sources. It includes all changes in
equity during a period except those resulting from investments by owners and
distributions to owners." Presently, there are certain changes in assets and
liabilities not reported in a statement that reports results of operations
for the period in which they are recognized but instead are included in
balances within a separate component of equity in a statement of financial
position. SFAS 130 amends SFAS 87 and 115 to require that changes in the
balances of items that under those statements are reported directly in a
separate component of equity in a statement of financial position be reported
in a financial statement that is displayed as prominently as other financial
statements. Items required by accounting standards to be reported as direct
adjustments to paid-in-capital, retained earnings, or other nonincome equity
accounts are not to be included as components of comprehensive income. SFAS
130 shall be effective for fiscal years beginning after December 15, 1997
with earlier application permitted. All comparative financial statements
provided for earlier periods shall be reclassified to reflect application of
the provisions of this statement.
26
<PAGE>
PEKIN SAVINGS BANK AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2--MONEY MARKET INVESTMENTS AND INVESTMENT SECURITIES
Money market investments and investment securities at September 30, 1997
and 1996 are summarized as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997
---------------------------------------------------
<S> <C> <C> <C> <C>
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
------------ ----------- ------------ ----------
Held-to-maturity:
Investment securities:
U.S. government agencies................................... $ 4,486,492 $ 2,414 $ (24,191) $ 4,464,715
Municipal obligations...................................... 990,425 27,755 -- 1,018,180
Stock in Federal Home Loan
Bank, at cost............................................. 618,800 -- -- 618,800
------------ ----------- ----------- ----------
$ 6,095,717 $ 30,169 $ (24,191) $6,101,695
------------ ----------- ----------- ----------
------------ ----------- ----------- ----------
Available-for-sale:
Money market investments:
Short-term liquidity funds................................. $ 127,930 $ -- $ -- $ 127,930
Investment securities:
U.S. Treasury securities................................... 2,490,091 40,886 (3,512) 2,527,465
U.S. government agencies................................... 2,499,409 26,041 -- 2,525,450
Mutual funds............................................... 612,474 -- (5,145) 607,329
------------ ----------- ------------ ----------
$ 5,729,904 $ 66,927 $ (8,657) $ 5,788,174
------------ ----------- ------------ ----------
------------ ----------- ------------ ----------
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30, 1996
---------------------------------------------------
<S> <C> <C> <C> <C>
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
------------ ----------- ------------ ----------
Held-to-maturity:
Investment securities:
U.S. government agencies.................................... $ 5,466,813 $ -- $(107,738) $ 5,359,075
Municipal obligations....................................... 989,590 3,713 (10,842) 982,461
Stock in Federal Home Loan
Bank, at cost.............................................. 601,100 -- -- 601,100
------------ ----------- ------------ ----------
$ 7,057,503 $ 3,713 $(118,580) $ 6,942,636
------------ ----------- ------------ ----------
------------ ----------- ------------ ----------
Available-for-sale:
Money market investments:
Short-term liquidity funds.................................. $ 124,256 $ -- $ -- $ 124,256
Investment securities:
U.S. Treasury securities.................................... 2,496,329 18,563 (16,538) 2,498,354
U.S. government agencies.................................... 999,386 325 (8,505) 991,206
Mutual funds................................................ 577,012 -- (9,876) 567,136
------------ ----------- ------------ ----------
$ 4,196,983 $ 18,888 $ (34,919) $4,180,952
------------ ----------- ------------ ----------
------------ ----------- ------------ ----------
</TABLE>
27
<PAGE>
PEKIN SAVINGS BANK AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2--MONEY MARKET INVESTMENTS AND INVESTMENT SECURITIES (CONTINUED)
The amortized cost and estimated market value of money market investments
and investment securities at September 30, 1997, by contractual maturity, are
shown below. Expected maturities will differ from contractual maturities
because borrowers may have the right to call or prepay obligations with or
without call or prepayment penalties.
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997
--------------------------
<S> <C> <C>
AMORTIZED ESTIMATED
COST MARKET VALUE
------------ ------------
Held-to-maturity due:
Within one year...................................................................... $ 499,435 $ 492,645
After one year through five years.................................................... 2,497,976 2,485,135
After five years through ten years................................................... 2,379,906 2,397,758
After ten years...................................................................... 99,600 107,357
Stock in Federal Home Loan Bank (no stated maturity)................................. 618,800 618,800
------------ -----------
$ 6,095,717 $6,101,695
------------ -----------
------------ -----------
Available-for-sale due:
Within one year...................................................................... $ 500,000 $ 499,410
After one year through five years.................................................... 1,997,302 2,020,850
After five years through ten years................................................... 1,992,789 2,031,795
After ten years...................................................................... 499,409 500,860
Money market investments/mutual funds
(no stated maturity)................................................................ 740,404 735,259
------------ -----------
$ 5,729,904 $5,788,174
------------ -----------
------------ -----------
</TABLE>
The following is a schedule of proceeds from the sales of investment
securities and the gross gains and losses realized:
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
-------------------------
<S> <C> <C>
1997 1996
------------ ------------
Proceeds from sales.......................................................................... $ -- $ 3,499,390
------------ ------------
------------ ------------
Gross gains.................................................................................. $ -- $ 5,593
------------ ------------
------------ ------------
Gross losses................................................................................. $ -- $ 25,443
------------ ------------
------------ ------------
</TABLE>
28
<PAGE>
PEKIN SAVINGS BANK AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3--MORTGAGE-BACKED SECURITIES
Mortgage-backed securities at September 30, 1997 and 1996 are summarized
as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997
---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
GROSS GROSS ESTIMATED
PRINCIPAL UNAMORTIZED UNEARNED AMORTIZED UNREALIZED UNREALIZED MARKET
BALANCE PREMIUMS DISCOUNTS COST GAINS LOSSES VALUE
------------ ------------- ------------ ---------- ------------ ------------ ----------
Held-to-maturity:
FNMA certificates........... $ 2,949,383 $ 3,909 $ (24,297) $2,928,995 $ 33,359 $ -- $2,962,354
FHLMC certificates.......... 2,256,303 4,536 (4,789) 2,256,050 6,713 (6,016) 2,256,747
FNMA interest-only security,
net of $62,363 allowance
for loss.................. -- -- -- -- -- -- --
------------ ------ ------------ ---------- ------------ ------------ ----------
$ 5,205,686 $ 8,445 $ (29,086) $5,185,045 $ 40,072 $ (6,016) $5,219,101
------------ ------ ------------ ---------- ------------ ------------ ----------
------------ ------ ------------ ---------- ------------ ------------ ----------
Available-for-sale:
FNMA certificates........... $ 368,982 $ 1,147 $ (1,881) $ 368,248 $ 8,465 $ (738) $ 375,975
GNMA certificates........... 1,997,643 -- (5,600) 1,992,043 13,866 (8,354) 1,997,555
FHLMC certificates.......... 561,050 -- (3,798) 557,252 6,726 -- 563,978
------------ ------ ------------ ---------- ------------ ------------ ----------
$ 2,927,675 $ 1,147 $ (11,279) $2,917,543 $ 29,057 $ (9,092) $2,937,508
------------ ------ ------------ ---------- ------------ ------------ ----------
------------ ------ ------------ ---------- ------------ ------------ ----------
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30, 1996
-------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
GROSS GROSS ESTIMATED
PRINCIPAL UNAMORTIZED UNEARNED AMORTIZED UNREALIZED UNREALIZED MARKET
BALANCE PREMIUMS DISCOUNTS COST GAINS LOSSES VALUE
------------ ------------ ------------ ---------- ------------ ----------- ----------
Held-to-maturity:
FNMA certificates............. $ 3,528,534 $ 5,027 $ (27,387) $3,506,174 $ 28,486 $ (28,887) $3,505,773
FHLMC certificates............ 2,931,368 6,434 (5,437) 2,932,365 498 (71,035) 2,861,828
FNMA interest-only security,
net of $72,165 allowance for
loss........................ -- -- -- -- -- -- --
------------ ------------ ------------ ---------- ------------ ----------- ----------
$ 6,459,902 $ 11,461 $ (32,824) $6,438,539 $ 28,984 $ (99,922) $6,367,601
------------ ------------ ------------ ---------- ------------ ----------- ----------
------------ ------------ ------------ ---------- ------------ ----------- ----------
Available-for-sale:
FNMA certificates............. $ 511,134 $ 1,621 $ (2,473) $ 510,282 $ 9,021 $ (10,687) $ 508,616
GNMA certificates............. 3,130,842 4,697 (6,458) 3,129,081 7,451 (85,308) 3,051,224
FHLMC certificates............ 655,520 -- (4,488) 651,032 1,043 (11,007) 641,068
------------ ------------ ------------ ---------- ------------ ----------- ----------
</TABLE>
29
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C>
$ 4,297,496 $ 6,318 $ (13,419) $4,290,395 $ 17,515 $ (107,002) $4,200,908
------------ ------------ ------------ ---------- ------------ ----------- ----------
------------ ------------ ------------ ---------- ------------ ----------- ----------
</TABLE>
The following is a schedule of proceeds from the sales of mortgage-backed
securities and the gross gains realized:
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
-------------------------
<S> <C> <C>
1997 1996
----------- ------------
Proceeds from sales..................................................................... $ 885,061 $ 2,059,125
----------- ------------
---------- ------------
Gross gains............................................................................. $ 4,381 $ 56,930
---------- ------------
---------- ------------
</TABLE>
30
<PAGE>
PEKIN SAVINGS BANK AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4--LOANS HELD FOR SALE
The following is a schedule of proceeds from the sales of loans held for
sale and the gross gains and losses realized:
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
--------------------------
<S> <C> <C>
1997 1996
------------ ------------
Proceeds from sales................................................................... $ 5,844,051 $ 6,704,237
------------ ------------
------------ ------------
Gross gains........................................................................... $ 68,619 $ 84,679
------------ ------------
------------ ------------
</TABLE>
NOTE 5--LOANS RECEIVABLE
Loans receivable at September 30, 1997 and 1996 are summarized as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30,
----------------------------
<S> <C> <C>
1997 1996
------------- -------------
First mortgage loans:
One-to-four family residential................................................... $ 43,647,843 $ 42,874,121
Other conventional real estate................................................... 1,428,278 1,761,878
Participation investment in loans purchased...................................... 168,527 195,115
Other loans...................................................................... -- 7,868
------------- -------------
45,244,648 44,838,982
Less deferred loan fees.......................................................... 144,650 170,176
------------- -------------
Total first mortgage loans..................................................... 45,099,998 44,668,806
------------- -------------
Other loans:
Real estate sold on contract..................................................... 3,021,886 3,475,965
Loans on savings accounts........................................................ 104,776 148,594
Consumer loans................................................................... 10,082,218 7,937,752
------------- -------------
13,208,880 11,562,311
Less unearned discounts............................................................ 148,320 235,647
------------- -------------
Total other loans.............................................................. 13,060,560 11,326,664
------------- -------------
Less allowance for loan losses..................................................... 223,121 218,280
------------- -------------
$ 57,937,437 $ 55,777,190
------------- -------------
------------- -------------
</TABLE>
31
<PAGE>
PEKIN SAVINGS BANK AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5--LOANS RECEIVABLE (CONTINUED)
The weighted average yield on loans receivable was 7.93 and 7.91 percent
at September 30, 1997 and 1996, respectively.
Mortgage loans serviced for others are not included in the accompanying
consolidated balance sheets. The unpaid principal balances of these loans
were $20,642,141 and $18,732,302 at September 30, 1997 and 1996, respectively.
The Bank had outstanding firm commitments to originate first mortgage
loans as follows:
SEPTEMBER 30, 1997
-------------------------
INTEREST
COMMITMENT RATE RANGE
------------ -----------
Fixed rate:
15 years ..................................... $ 619,600 7.50%
30 years ..................................... 126,850 7.875
------------
TOTAL COMMITMENT ................................ $ 746,450
------------
------------
These loans carry comparable credit and market risk as the Bank's
portfolio of first mortgage loans.
Activity in the allowance for loan losses is summarized as follows:
YEARS ENDED SEPTEMBER 30,
-------------------------
1997 1996
----------- ------------
Balance at beginning of year.................... $ 218,280 $ 212,043
Provision charged to operations................. 12,000 12,000
Charge-offs..................................... (9,325) (5,763)
Recoveries...................................... 2,166 --
----------- ------------
BALANCE AT END OF YEAR.......................... $ 223,121 $ 218,280
----------- ------------
----------- ------------
Impairment of loans having a recorded value of $463,742 and $108,915 at
September 30, 1997 and 1996, respectively, has been recognized in conformity
with SFAS No. 114 as amended by SFAS No. 118. The average investment in
impaired loans during 1997 and 1996 was $204,800 and $142,100, respectively.
Interest income foregone on impaired loans during 1997 and 1996 was $11,814
and $6,894, respectively.
32
<PAGE>
PEKIN SAVINGS BANK AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5--LOANS RECEIVABLE (CONTINUED)
The Bank, in the ordinary course of business, has granted residential
mortgages and consumer loans to its directors and executive officers. A
summary of activity in these loans is as follows:
YEARS ENDED
SEPTEMBER 30,
----------------------
1997 1996
---------- ----------
Balance at beginning of year.................... $ 757,352 $ 754,093
New loans granted............................... 421,000 217,590
Repayments...................................... (392,566) (214,331)
---------- ----------
BALANCE AT END OF YEAR.......................... $ 785,786 $ 757,352
---------- ----------
---------- ----------
NOTE 6--ACCRUED INTEREST RECEIVABLE
Accrued interest receivable is summarized as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30,
----------------------
1997 1996
---------- ----------
<S> <C> <C>
Money market investments and investment securities.............. $ 167,218 $ 144,432
Mortgage-backed securities...................................... 44,438 58,655
Loans receivable................................................ 291,212 282,268
---------- ----------
TOTAL........................................................... $ 502,868 $ 485,355
---------- ----------
---------- ----------
</TABLE>
NOTE 7--REAL ESTATE OWNED
Activity in the allowance for losses on real estate owned is summarized as
follows:
YEARS ENDED
SEPTEMBER 30,
--------------------
1997 1996
--------- ---------
Balance at beginning of year.................... $ 7,500 $ --
Provisions charged to income.................... -- 7,500
Charge-offs..................................... (7,500) --
--------- ---------
BALANCE AT END OF YEAR.......................... $ -- $ 7,500
--------- ---------
--------- ---------
33
<PAGE>
PEKIN SAVINGS BANK AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8--PREMISES AND EQUIPMENT
A summary of premises and equipment follows:
SEPTEMBER 30,
--------------------------
1997 1996
------------ ------------
Land............................................ $ 381,135 $ 381,135
Office building................................. 874,871 701,875
Land improvements............................... 247,324 245,110
Furniture, fixtures, and equipment.............. 602,575 585,044
Construction in progress........................ -- 111,197
------------ ------------
2,105,905 2,024,361
Less accumulated depreciation................... 1,055,280 944,876
------------ ------------
NET............................................. $ 1,050,625 $ 1,079,485
------------ ------------
------------ ------------
Depreciation expense for premises and equipment amounted to $110,404 and
$90,894 for the years ended September 30, 1997 and 1996, respectively.
NOTE 9--SAVINGS DEPOSITS
Savings account balances at September 30, 1997 and 1996 are summarized as
follows:
<TABLE>
<CAPTION>
WEIGHTED SEPTEMBER 30, WEIGHTED SEPTEMBER 30,
AVERAGE 1997 AVERAGE 1996
INTEREST --------------------------- INTEREST ---------------------------
RATE AMOUNT PERCENT RATE AMOUNT PERCENT
---------- ------------- ------------ ---------- ------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Balance by type of account:
Demand accounts:
Passbook........................... 2.48% $ 7,904,612 11.4% 2.48% $ 8,474,267 12.6%
Christmas Club..................... 2.48 102,878 .1 2.48 102,529 .2
Demand deposits.................... .92 3,603,525 5.2 1.03 3,316,467 4.9
Money market deposit
accounts......................... 2.99 4,084,779 5.9 2.99 4,645,417 6.9
------------- ------------ ------------- ------------
15,695,794 22.6 16,538,680 24.6
------------- ------------ ------------- ------------
Certificates of deposit:
6-12 month certificates............ 2.51 22,314 .1 2.50 38,340 .1
12 month certificates.............. 5.73 13,920,629 20.1 5.37 11,575,489 17.2
24 month certificates.............. 5.70 7,134,826 10.3 5.91 6,630,138 9.8
36 month certificates.............. 6.13 3,298,795 4.8 5.85 3,043,561 4.5
48 month certificates.............. 6.32 2,182,103 3.2 6.15 1,739,409 2.6
60 month certificates.............. 6.17 20,712,187 30.0 6.14 21,544,006 32.0
Various term certificates.......... 2.53 114,387 .2 2.89 220,146 .3
Individual retirement
accounts......................... 5.83 5,977,671 8.7 5.96 5,992,917 8.9
------------- ------------ ------------- ------------
53,362,912 77.4 50,784,006 75.4
------------- ------------ ------------- ------------
</TABLE>
34
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
TOTAL DEPOSITS..................... 5.95% $ 69,058,706 100.0% 5.88% $ 67,322,686 100.0%
------------- ------------ ------------- ------------
------------- ------------ ------------- ------------
</TABLE>
35
<PAGE>
PEKIN SAVINGS BANK AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9--SAVINGS DEPOSITS (CONTINUED)
INTEREST EXPENSE FOR DEPOSIT ACCOUNTS IS SUMMARIZED AS FOLLOWS:
YEARS ENDED SEPTEMBER 30,
--------------------------
1997 1996
------------ ------------
Demand deposits................................ $ 36,034 $ 37,720
Money market deposit accounts.................. 133,360 144,289
Passbook and Christmas Club accounts........... 206,593 234,175
Certificates of deposit:
$100,000 and over........................... 206,623 198,186
Less than $100,000.......................... 2,762,301 2,754,457
----------- -----------
$ 3,344,911 $ 3,368,827
----------- -----------
----------- -----------
Time deposits issued in amounts of $100,000 or more totaled approximately
$3,637,400 and $3,604,000 at September 30, 1997 and 1996, respectively.
Contractual maturities of certificates of deposit at September 30, 1997 were
as follows:
AMOUNT PERCENT
----------- -------
YEAR ENDING SEPTEMBER 30,
1998................................ $32,909,132 61.7%
1999................................ 11,501,056 21.6
2000................................ 4,958,982 9.3
2001................................ 2,258,472 4.2
2002................................ 1,735,270 3.2
----------- -----
$53,362,912 100.0%
----------- -----
----------- -----
NOTE 10--BORROWED FUNDS
Borrowed funds at September 30 are summarized as follows:
1997
INTEREST
MATURITY RATE AMOUNT
---------------- ---- -----------
Federal Home Loan Bank: August 31, 1998 5.10% $ 2,000,000
October 20, 1998 5.06 2,000,000
July 24, 2000 6.28 1,000,000
August 8, 2002 5.40 1,000,000
June 14, 2005 6.71 2,000,000
-----------
$ 8,000,000
-----------
-----------
36
<PAGE>
PEKIN SAVINGS BANK AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10--BORROWED FUNDS (CONTINUED)
1996
MATURITY INTEREST RATE AMOUNT
------------------- ------------- ------------
Federal Home Loan Bank: September 22, 1997 7.02% $ 2,000,000
August 31, 1998 5.10 2,000,000
October 20, 1998 5.06 2,000,000
June 14, 2005 6.71 2,000,000
-----------
$ 8,000,000
-----------
-----------
Funds borrowed from the Federal Home Loan Bank (FHLB) are secured by a
blanket lien on the first mortgage loans. FHLB requires collateral market value
to equal 170 percent of advances.
NOTE 11--INCOME TAXES
The components of income tax expense (benefit) are summarized as follows:
<TABLE>
<CAPTION>
1997 1996
---------------------------------- ------------------------------
CURRENT DEFERRED TOTAL CURRENT DEFERRED TOTAL
---------- ---------- ---------- ---------- --------- -------
<S> <C> <C> <C> <C> <C> <C>
Federal.................. $ 174,298 $ 165,306 $ 339,604 $ 212,599 $(125,644) $86,955
State.................... 20,655 38,287 58,942 29,858 (29,101) 757
---------- ---------- ---------- ---------- --------- --------
INCOME TAX EXPENSE....... $ 194,953 $ 203,593 $ 398,546 $ 242,457 $(154,745) $87,712
---------- ---------- ---------- ---------- --------- -------
---------- ---------- ---------- ---------- --------- -------
</TABLE>
The actual income tax expense differs from the 'expected' tax expense
(computed by applying the United States Federal corporate tax rate of 34 percent
to income before income taxes) as follows:
<TABLE>
<CAPTION>
YEARS ENDED
SEPTEMBER 30,
----------------------
1997 1996
---------- ----------
<S> <C> <C>
Computed 'expected' tax expense................... $ 371,802 $ 163,514
Prior years overaccrual........................... -- (84,892)
State income taxes, net of federal
income tax benefit............................. 13,632 19,706
Tax-exempt income................................. (13,956) (20,816)
Nondeductible expenses............................ 6,199 5,196
Other, net........................................ 20,869 5,004
---------- ----------
$ 398,546 $ 87,712
---------- ----------
---------- ----------
</TABLE>
37
<PAGE>
PEKIN SAVINGS BANK AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11--INCOME TAXES (CONTINUED)
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities are presented
below:
<TABLE>
<CAPTION>
SEPTEMBER 30,
---------------------
1997 1996
--------- ----------
<S> <C> <C>
Deferred tax assets:
Deferred loan fees.................................... $ 56,036 $ 65,924
Uncollected interest.................................. 24,159 27,956
Allowance for loan losses............................. 24,862 38,991
Loan discount......................................... 28,751 34,438
Real estate owned..................................... -- 2,905
BIF/SAIF special assessment........................... -- 170,469
Security market value adjustments, net................ -- 35,867
--------- ----------
133,808 376,550
Valuation allowance for deferred tax assets............. (1,993) (3,826)
--------- ----------
Total deferred tax assets......................... 131,815 372,724
--------- ----------
Deferred tax liabilities:
Depreciation.......................................... 4,545 5,994
FHLB stock dividends.................................. 21,190 21,190
Securities market value adjustments, net.............. 26,598 --
--------- ----------
Total deferred tax liabilities...................... 52,333 27,184
--------- ----------
NET DEFERRED TAX ASSET.................................. $ 79,482 $ 345,540
--------- ----------
--------- ----------
</TABLE>
The net deferred tax asset is included in other assets in the accompanying
balance sheets.
NOTE 12--RETAINED EARNINGS--SUBSTANTIALLY RESTRICTED
Retained earnings at September 30, 1997 and 1996 includes approximately
$793,000 and $832,000, respectively, for which no provision for Federal income
tax has been made. This amount represents allocations of income to bad debt
deductions for tax purposes only. Reduction of amounts so allocated for purposes
other than tax bad debt losses will create income for tax purposes only, which
will be subject to the then current corporate income tax rate.
38
<PAGE>
PEKIN SAVINGS BANK AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 13--EMPLOYEE RETIREMENT PLANS
All eligible employees are included in a noncontributory multi-employer
trusteed pension plan. The Bank's policy is to fund pension costs accrued.
The amount of pension expense in 1997 and 1996 was $3,400 and $45,000,
respectively.
The Bank has a multiple-employer thrift plan for all salaried employees
meeting minimum age and service requirements. The plan allows employees to
make a monthly contribution of 2 to 15 percent of their salary through
payroll deduction. The Bank matches 50 percent of the employee's
contribution up to 6 percent of the employee's salary. Thrift plan expense
amounted to $17,839 and $15,410 for the years ended September 30, 1997 and
1996, respectively.
NOTE 14--REGULATORY MATTERS
The Bank is subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory--and possibly additional
discretionary--actions by regulators that, if undertaken, could have a
direct material effect on the Bank's financial statements. Under capital
adequacy guidelines and the regulatory framework for prompt corrective
action, the Bank must meet specific capital guidelines that involve
quantitative measures of the Bank's assets, liabilities, and certain
off-balance-sheet items as calculated under regulatory accounting practices.
The Bank's capital amounts and classification are also subject to qualitative
judgments by the regulators about components, risk weightings, and other
factors.
Quantitative measures established by regulation to ensure capital
adequacy require the Bank to maintain minimum amounts and ratios (set forth
in the following table) of total and Tier I capital (as defined in the
regulations) to risk-weighted assets (as defined), and of Tier I capital (as
defined) to average assets (as defined). Management believes, as of September
30, 1997, that the Bank meets all capital adequacy requirements to which it
is subject.
As of September 30, 1997, the most recent notification from the Federal
Deposit Insurance Corporation categorized the Bank as well capitalized under
the regulatory framework for prompt corrective action. To be categorized as
well capitalized the Bank must maintain minimum total risk-based, Tier I
risk-based, and Tier I leverage ratios as set forth in the table. There are
no conditions or events since that notification that management believes have
changed the Bank's category.
39
<PAGE>
PEKIN SAVINGS BANK AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 14--REGULATORY MATTERS (CONTINUED)
The Bank's actual capital amounts and ratios are also presented in the
table:
<TABLE>
<CAPTION>
TO BE WELL
CAPITALIZED UNDER
PROMPT CORRECTIVE
ACTUAL ACTION PROVISIONS
------------------------- -------------------------
<S> <C> <C> <C> <C>
AMOUNT RATIO AMOUNT RATIO
------------ ----- ------------ -----
As of September 30, 1997:
Total capital (to risk weighted assets)... $ 7,440,516 18.2% $ 4,090,410 10%
Tier I capital (to risk weighted assets).. 7,217,395 17.6 2,454,246 6
Tier I capital (to average assets)........ 7,217,395 8.4 4,302,000 5
</TABLE>
<TABLE>
<CAPTION>
TO BE WELL
CAPITALIZED UNDER
PROMPT CORRECTIVE
ACTUAL ACTION PROVISIONS
------------------------- -------------------------
<S> <C> <C> <C> <C>
AMOUNT RATIO AMOUNT RATIO
------------ ----- ------------ -----
As of September 30, 1996:
Total capital (to risk weighted assets)... $ 6,944,722 18.2% $ 3,825,910 10%
Tier I capital (to risk weighted assets).. 6,726,442 17.6 2,295,546 6
Tier I capital (to average assets)........ 6,726,442 8.0 4,195,681 5
</TABLE>
NOTE 15--CONVERSION TO STOCK OWNERSHIP
On September 29, 1992, the Bank converted from a mutual savings and loan to
a capital stock savings and loan. The Bank consummated a public offering of
164,487 shares of common stock which generated net proceeds, after expenses and
underwriters cost, of $1,317,411.
For purposes of granting to eligible account holders, who continue to
maintain deposit accounts subsequent to the conversion, a priority in the event
of a complete liquidation of the Bank, the Bank has, at the time of conversion,
established a liquidation account in an amount equal to its appraised fair
market valuation. The value of the liquidation account at conversion was
approximately $2,526,000. The liquidation account is reduced by depositor
account withdrawals subsequent to the conversion date. The balance of the
liquidation account at September 30, 1997 was approximately $1,259,000. In the
unlikely event of a complete liquidation of the Bank, and only in such event,
each eligible account holder would be entitled to receive a liquidation
distribution on a pro rata basis from the liquidation account before any
liquidation distribution may be made with respect to capital stock. The Bank may
not declare or pay a cash dividend on, or repurchase any of, its capital stock
if the effect thereof would cause the retained earnings of the Bank to be
reduced below the amount required for the liquidation account. Except for such
restrictions, the existence of the liquidation account does not restrict the use
of or application of retained earnings.
40
<PAGE>
PEKIN SAVINGS BANK AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 16--STOCK OPTION PLAN
In connection with the conversion to a capital stock form of ownership, the
Bank adopted a stock option plan. Pursuant to the plan, 12,763 shares of common
stock have been reserved for issuance at September 30, 1997 by the Bank upon
exercise of stock options to officers, directors and employees of the Bank from
time to time under the plan. The plan provides for a term of ten years, after
which no awards may be made.
Officers, directors, and employees will be eligible to receive options under
the plan. The option price may not be less than 100 percent of the fair market
value of the shares on the date of the grant, and expire ten years from the date
of the grant. The Bank has granted options to certain officers, directors, and
employees at option prices of $10.00 and $21.00 per share.
Transactions with respect to the Bank's stock option plan are as follows:
WEIGHTED-AVERAGE NUMBER OF
EXERCISE SHARES UNDER
PRICE PER SHARE OPTIONS
----------------- -------------
Outstanding at September 30, 1995......... $ 10.53 14,137
------
------
Exercised................................. $ 10.00 (641)
------ ------
------
Outstanding at September 30, 1996......... $ 10.56 13,496
------
------
Exercised................................. $ 20.25 (733)
------ ------
------
Outstanding at September 30, 1997......... $ 10.00 12,763
------ ------
------ ------
Exercisable at September 30, 1997......... $ 10.00 10,853
------ ------
------ ------
At September 30, 1997, the exercise price and weighted-average remaining
contractual life of outstanding options was $10.00 and 5 years, respectively.
The Bank applies APB Opinion 25 and related interpretations in the
accounting for its plan. Accordingly, no compensation cost has been recognized
under APB Opinion 25 in 1997 and 1996 for its stock option plan. Since no stock
options were granted during 1996 and 1997, pro forma net income and income per
share amounts reflecting compensation costs determined under SFAS No. 123,
ACCOUNTING FOR STOCK-BASED COMPENSATION is not presented.
41
<PAGE>
PEKIN SAVINGS BANK AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 17--BIF/SAIF SPECIAL ASSESSMENT
On September 30, 1996, President Clinton signed the thrift fund rescue
and relief package as part of an omnibus spending measure. Under the plan,
premium disparity between thrifts and banks is reduced and a framework is in
place to merge charters and funds. Thrifts (including thrifts converted to
savings banks) were required to make a one-time special assessment of
approximately 66 basis points against an assessment base of March 31, 1995
deposits to capitalize SAIF. On an on-going basis, SAIF members will pay
$.0644 on every $100 in deposits, down from $.23, a 70 percent reduction. The
Bank's special assessment amounted to $440,046 and is included in accrued
expenses and other liabilities in the accompanying September 30, 1996 balance
sheet.
NOTE 18--FAIR VALUES OF FINANCIAL INSTRUMENTS
SFAS No. 107, DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS,
requires disclosure of fair value information about financial instruments,
whether or not recognized in the balance sheet, for which it is practicable
to estimate that value. In cases where quoted market prices are not
available, fair values are based on estimates using present value or other
valuation techniques. Those techniques are significantly affected by the
assumptions used, including the discount rate and estimates of future cash
flows. In that regard, the derived fair value estimates cannot be
substantiated by comparison to independent markets and, in many cases, could
not be realized in immediate settlement of the instrument. SFAS No. 107
excludes certain financial instruments and all nonfinancial instruments from
its disclosure requirements. These fair value disclosures are not intended to
represent the market value of the Bank. Income taxes and transaction costs
have not been considered in estimating fair values.
The following methods and assumptions were used by the Bank in estimating
fair values of financial instruments:
CASH AND SHORT-TERM INSTRUMENTS
The carrying amounts of cash and short-term instruments approximate their
fair value.
AVAILABLE-FOR-SALE AND HELD-TO-MATURITY SECURITIES
Fair values for securities, excluding restricted equity securities, are
based on quoted market prices. The carrying values of restricted equity
securities approximate fair values.
LOANS RECEIVABLE
For adjustable-rate loans that reprice frequently and have no significant
change in credit risk, fair values are based on carrying values. Fair values
for fixed-rate loans are estimated using discounted cash flow analyses, using
interest rates currently being offered for loans with similar terms to
borrowers of similar credit quality. Fair values for impaired loans are
estimated using discounted cash flow analyses or underlying collateral
values, where applicable.
42
<PAGE>
DEPOSITS
The fair values disclosed for demand deposits are, by definition, equal
to the amount payable on demand at the reporting date (that is, their
carrying amounts). Fair values for fixed-rate certificates of deposit are
estimated using a discounted cash flow calculation that applies interest
rates currently being offered on certificates to a schedule of aggregated
expected monthly maturities on time deposits.
BORROWED FUNDS
The fair values of the Bank's long-term debt are estimated using
discounted cash flow analyses based on the Bank's current incremental
borrowing rates for similar types of borrowing arrangements.
ACCRUED INTEREST
The carrying amounts of accrued interest approximate their fair values.
The estimated fair values of the Bank's financial instruments were as
follows:
PEKIN SAVINGS BANK AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 18--FAIR VALUES OF FINANCIAL INSTRUMENTS (CONTINUED)
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997 SEPTEMBER 30, 1996
---------------------- ----------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
----------- --------- ----------- ---------
(DOLLARS IN THOUSANDS) (DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Financial assets:
Cash and amounts due from banks and interest-bearing deposits.......... $ 4,968 $ 4,968 $ 2,690 $ 2,690
Money market investments and investment securities..................... 11,884 11,890 11,238 11,124
Mortgage-backed securities............................................. 8,123 8,157 10,639 10,569
Loans receivable....................................................... 57,937 58,295 55,777 55,002
Accrued interest receivable............................................ 503 503 485 485
Financial liabilities:
Deposits............................................................... 69,059 69,128 67,323 67,759
Borrowed funds......................................................... 8,000 7,934 8,000 7,862
Accrued interest payable............................................... 39 39 41 41
</TABLE>
43
<PAGE>
PEKIN SAVINGS BANK AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 19--SUBSEQUENT EVENTS
On October 10, 1997, the stockholders approved the reorganization of the
Bank into the holding company form of ownership to which the Bank became a
wholly owned subsidiary of Progressive Bancorp, Inc., a newly formed Delaware
corporation, and each outstanding share of common stock of the Bank will be
converted into one share of common stock of Progressive Bancorp, Inc.
The stockholders also approved an amendment to the Articles of
Incorporation of the Bank to change the name of the Bank from Pekin Savings,
s.b. to "Pekin Savings Bank."
44
<PAGE>
PEKIN
SAVINGS BANK
AND
SUBSIDIARY
CONSOLIDATED
FINANCIAL
STATEMENTS
September 30, 1997
and 1996
<PAGE>
EXHIBIT 21
SUBSIDIARIES OF REGISTRANT
<PAGE>
SUBSIDIARIES OF THE REGISTRANT
<TABLE>
<CAPTION>
STATE OF
PERCENTAGE OF INCORPORATION
PARENT SUBSIDIARY OWNERSHIP OR ORGANIZATION
- ---------------------------------------- ---------------------------------------- --------------- ---------------
<S> <C> <C> <C>
Progressive Bancorp, Inc. Pekin Savings Bank 100% Illinois
Pekin Savings Bank Pekin Financial Service Corporation 100% Illinois
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-END> SEP-30-1997
<CASH> 540
<INT-BEARING-DEPOSITS> 4,043
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 9,343
<INVESTMENTS-CARRYING> 10,661
<INVESTMENTS-MARKET> 10,702
<LOANS> 58,195
<ALLOWANCE> 256
<TOTAL-ASSETS> 85,252
<DEPOSITS> 69,270
<SHORT-TERM> 3,000
<LIABILITIES-OTHER> 663
<LONG-TERM> 5,000
168
0
<COMMON> 0
<OTHER-SE> 7,151
<TOTAL-LIABILITIES-AND-EQUITY> 85,252
<INTEREST-LOAN> 4,545
<INTEREST-INVEST> 1,341
<INTEREST-OTHER> 219
<INTEREST-TOTAL> 6,105
<INTEREST-DEPOSIT> 3,345
<INTEREST-EXPENSE> 3,846
<INTEREST-INCOME-NET> 2,259
<LOAN-LOSSES> 12
<SECURITIES-GAINS> 73
<EXPENSE-OTHER> 1,226
<INCOME-PRETAX> 1,094
<INCOME-PRE-EXTRAORDINARY> 1,094
<EXTRAORDINARY> 695
<CHANGES> 0
<NET-INCOME> 695
<EPS-PRIMARY> 3.92
<EPS-DILUTED> 3.92
<YIELD-ACTUAL> 2.80
<LOANS-NON> 0
<LOANS-PAST> 464
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 467
<ALLOWANCE-OPEN> 218
<CHARGE-OFFS> 9
<RECOVERIES> 2
<ALLOWANCE-CLOSE> 223
<ALLOWANCE-DOMESTIC> 223
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
